Inflation is under control. Unemployment isn't. Your government is heading for defeat.
Inflation2.0%
Unemployment7.0%
PollingBEHIND
Election12 MONTHS
THE PM: “Price stability won't save us if people can't find work. Find me a way out.”
The discovery
YOUR ECONOMISTS DRAW THIS.
WHERE DID THIS COME FROM?
A. W. Phillips (1958) plotted almost a century of UK data and found an inverse relationship between unemployment and the rate of change of money wages.
The fitted relationship was curved, not a straight line: wage pressure rose increasingly sharply as unemployment became very low.
The original Phillips Curve concerned wage inflation. The familiar price-inflation version followed as economists connected wage pressure to firms' costs and prices.
Economic story: unemployment ↓ → labour market tightens → firms compete for scarce workers → wage growth ↑ → firms' costs and price pressure ↑. Near full employment, that pressure can rise sharply.
From observation to policy
THE CURVE BECOMES A POLICY MENU.
DEMAND ↑
→
OUTPUT ↑
→
HIRING ↑
→
UNEMPLOYMENT ↓
→
INFLATION ↑
If policy can alter aggregate demand, your government may be able to choose a position along the Phillips Curve.
The temptation: accept some inflation, create more employment, and walk into the election with a stronger economy.
Election gamble · economic consequences visible
CHOOSE THE ECONOMY. THEN FACE THE VOTERS.
FULLER EMPLOYMENTPRICE STABILITY
Inflation2.5%
Unemployment6.1%
THE ECONOMIC PRICE
UNEMPLOYMENTLost income and output; skills can deteriorate; households face insecurity and hardship.
INFLATIONPurchasing power is eroded; uncertainty rises; fixed incomes and cash savings lose real value.
YOUR PROBLEMMoving along the curve reduces one cost only by accepting more of the other.
MAKE THE ECONOMIC JUDGEMENT FIRST. Choose the combination of inflation and unemployment you are willing to defend. The political consequences come afterwards.
Policy locked
THE CAMPAIGN BEGINS.
Inflation you chose
Unemployment you chose
Polling modelSEALED
Economic choice made. You have decided how much unemployment to tolerate and how much inflation to accept. Now comes the part the Phillips Curve cannot answer: will voters accept your trade-off?
Polling outcome · the politics
VOTERS NOW PRICE YOUR ECONOMIC CHOICE.
Your economic trade-off is the same. Its political value is not: all three groups dislike unemployment and inflation, but they weight the two costs differently.
LABOUR VOTERS
—
CONSERVATIVE
—
LIB DEM
—
First result incoming...
Election night
COUNTING...
The three revealed polls are now being weighted into one result. You need 40.0% to survive.
Election result
Inflation
Unemployment
Your vote
Survival line44.0%
Seduction complete
YOU JUST TURNED THE ECONOMY INTO A POLITICAL CHOICE.
The Phillips Curve appears to give government a lever.
1 · TRADE
Accept more inflation to reduce unemployment.
2 · MANAGE
Use demand policy to move the economy along the curve.
3 · SURVIVE
Choose the combination whose economic costs voters are most willing to tolerate.
THIS IS THE SEDUCTION.
If the trade-off is stable, governments don't simply inherit inflation and unemployment. They can manipulate the balance between them.