The Phillips curve explains how higher employment can push up inflation.

Outline (brief)

• Hook: A surprising link between jobs and prices, and why it still matters.

• What the Phillips curve is, in plain language.

• How other theories see employment and inflation (quick contrasts).

• Real-world twists: when the curve works, and when it doesn’t.

• What this means for students and curious readers studying IB Economics HL topics.

• Quick wrap-up with practical takeaways and a few memorable analogies.

The Phillips curve: a simple idea with surprising twists

Let me explain it with a quick picture. Imagine an economy where jobs are plentiful. People who want work can find it, wages start to rise because firms compete for scarce labor. Those higher wages push up costs for businesses, and many of them lift prices a bit to keep profits healthy. Voilà—inflation starts to creep up. On the flip side, when unemployment is high, workers are easier to find, wages don’t rise as fast, and price pressures tend to ease. The Phillips curve captures that back-and-forth: lower unemployment tends to go hand in hand with higher inflation, and higher unemployment tends to cooler inflation.

This relationship isn’t a perfect, one-size-fits-all rule. It’s more like a trend observed in many economies over certain periods. The beauty of it is in the intuition: when labor markets tighten, you feel the price side in the short run. When labor markets loosen, inflation often softens. But the curve isn’t a guarantee—things can wobble because of expectations, supply shocks, or policy choices.

A bit of history helps make sense of the nuance. The idea comes from economist A. W. Phillips, who in 1958 linked wage growth to unemployment in the United Kingdom. Since then, economists have refined the story. In the short run, the curve can tilt or bend. In the long run, many argue that inflation expectations adjust, and the relationship may not hold in the same way. That’s where the “expectations-augmented” version shows up: if people expect higher inflation, they’ll demand higher wages to keep up, which can push inflation higher even if unemployment isn’t that low. It’s a reminder that psychology and policy mindsets matter as much as numbers on a chart.

How this compares with other big theories

To keep things clear, a quick pit-stop at how Classical, Keynesian, and Monetarist ideas view inflation and employment helps.

• Classical theory: Think of a well-oiled machine that naturally tends toward full employment. Prices and wages adjust quickly, and there’s little lasting trade-off between inflation and unemployment. In that world, governments aren’t stuck in a treadmill of fighting inflation and boosting jobs at the same time.

• Keynesian theory: This perspective shines when the economy isn’t at full speed. Demand—the total spending in the economy—drives employment and production. Inflation can rise if demand gets too hot, but there isn’t a simple, fixed link like the Phillips curve across all times. The focus is more on boosting demand during downturns and letting policy guide the path to recovery.

• Monetarist theory: Money matters. For them, inflation mostly follows changes in the money supply, especially if the central bank stirs up money too quickly. Employment and inflation aren’t bound in a neat, short-run handshake the way the Phillips curve suggests. It’s more about price levels and expectations shaped by money.

So where does the Phillips curve fit in? It sits between these views, offering a short-run narrative about how labor markets can translate into price changes. It doesn’t reject the other theories; it adds a lens for when the job market and prices move in tandem, at least for a while.

When the curve works—and when it might misbehave

Here’s the practical gist that helps you read real-world data.

• The short-run window: In the near term, a tight labor market can push wages up and pass those costs to consumers. If people expect prices to rise, they’re willing to accept higher wages and higher prices, which can sustain the inflation spike. In many economies, this is the phase where the Phillips curve is most visible.

• The long run and expectations: Over time, people adjust. If folks start to expect higher inflation, wage bargains rise, and the inflation pressure can persist even if unemployment falls. This can flatten or even “shift” the curve, meaning the simple inverse relationship doesn’t hold as neatly as it did in the short run.

• Supply shocks and policy punches: Imagine a sudden jump in oil prices or a big technological disruption. Such supply-side events can raise inflation without unemployment dropping, or even while unemployment stays stubbornly low. In those moments, the Phillips curve can look a bit wobbly.

• Regional and sector differences: Different countries, and even different industries within a country, can experience different dynamics. A booming tech sector might push wages up for a subset of workers, influencing inflation in a selective way. The economy is never a single number on a chart; it’s a mosaic of micro-patterns.

If you’re studying for HL, these twists matter. The curve is a powerful storytelling device, but you’ll want to be ready to discuss when it holds, when it shifts, and how expectations and policy interact. A robust answer often names the curve, then adds a caution: “But the long run is textured by expectations and supply conditions.”

A quick read on what it means for policy and understanding

• For central banks: The Phillips curve helps explain why lowering unemployment can come with inflation pressures. Depending on the state of expectations, a central bank might tighten policy to cool inflation or ease policy to support employment. The key is to watch how inflation expectations evolve.

• For students in IB Economics HL: This topic connects to several other ideas you’ll meet in the syllabus. It links to aggregate demand and supply, to the concept of the natural rate of unemployment, and to how expectations shape outcomes. It’s a nice example of how theory, data, and policy choices collide in the real world.

• For the curious reader: The curve isn’t just a classroom chart. It’s a lens for thinking about wage bargains, consumer budgets, and the visible hand of policy in everyday prices. When you walk into a shop and see prices nudging up a bit as more people are employed, you’re seeing a small, real-world echo of the Phillips curve in action.

Common questions you might have—and plain answers

• Does the curve always mean “more jobs = more inflation”? Not always. In the short run, there’s a tendency for that link to show up, but long-run dynamics, expectations, and shocks can weaken or reorient the relationship.

• Can inflation rise even with high unemployment? Yes, in cases of supply shocks or when expectations adjust, you can get stagflation—inflation with weak output. The curve doesn’t guarantee smooth sailing in every episode.

• How does this connect to other topics in HL? It threads through discussions of macro policy, the natural rate of unemployment, the role of expectations, and the impact of monetary policy. It’s a nice example of how multiple ideas in economics fit together.

A friendly analogy to seal the idea

Think of the economy like a busy restaurant. When business is booming and customers fill every table, cooks have to hustle, menus get more expensive, and you start noticing price tags climb. The staff are working hard, and the kitchen is lively. Now, if the restaurant suddenly has more staff and a calmer pace, wages stabilize, and prices don’t jump as much. But if the diners suddenly expect higher prices, they might push for bigger tips or higher wages, nudging costs up again. The Phillips curve is the restaurant’s heartbeat translated into a simple price-wage story: when employment is high, prices can rise; when employment eases, price pressure can cool—at least in the short run.

Putting it all together

• The Phillips curve captures a concrete and intuitive link: in the short run, tighter labor markets can push up inflation through wage growth and cost pressures.

• Other theories—Classical, Keynesian, Monetarist—offer different lenses on why inflation and unemployment behave the way they do. The Phillips curve isn’t a universal law, but it’s a powerful, teachable pattern that grows more nuanced with time.

• Real economies aren’t backdrops to a simple chart. They’re living systems where expectations, policy choices, and unexpected shocks constantly reshape the terrain. The curve may bend, shift, or pause, but it remains a crucial reference point for understanding how jobs and prices dance together.

If you found this perspective helpful, you’re joining a long line of economists who like to keep ideas grounded in intuition while respecting the messiness of the real world. The Phillips curve isn’t about memorizing a slogan; it’s about recognizing the dynamic tension between employment and inflation, and about asking the right questions when that tension shows up in data, policy statements, or a short-run forecast.

A closing thought

Next time you glance at a chart of unemployment against inflation, ask yourself: Where are we in the story—short run or long run? Are expectations aligned with what policymakers are doing? Have there been any surprising shocks that could shift the curve? By framing questions this way, you’ll not only remember the core idea, you’ll be ready to reason through the inevitable twists that real economies throw your way.

If you want to explore further, consider tracing how this concept shows up in different regions or during different time periods. You’ll notice the same core idea reappearing, sometimes with a sharper edge, sometimes with a softer touch. And that’s the beauty of economic theory—it’s a guide, not a prophecy. The world keeps changing, and so does our understanding of how jobs, prices, and policy interact.