Phillips Model

The Phillips Model illustrates the inverse relationship between inflation and unemployment. It suggests that when unemployment is low, wages tend to rise, leading to higher inflation because employers increase prices to cover higher labor costs. Conversely, when unemployment is high, wage growth slows, resulting in lower inflation. Policymakers often face a trade-off: efforts to reduce unemployment might boost inflation, while actions to control inflation could increase unemployment. The model helps understand this dynamic, guiding decisions on economic policy to balance employment levels and price stability.