Lecture.5
Shape of Phillips curve
According
to Phillips search rate of unemployment is not considered as employment level
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Phillips
curve analysis:
Background
of Philips:
In
the economic history explanation of inflation has been explain with the help of
3 different models.
A. Phillips curve model of inflation
B. Monetarist model of inflation
C. Structural inflation model
The
first model that of Phillips curve was presented by a British economist A.W
Phillips in November 1958. He published article (the relationship between unemployment
and the rate of change in money wage in UK from 1862 to 1957).
In
this article Philips has explain that use of monetary and fiscal policy has not
been so much successful to control wage push inflation. We can defined the Philips
curve as below.
Definition
of Phillips curve
Phillips
curve explanation relationship between rate of wage increase and date of price
increase to an examination of rate of wage increase and rate of unemployment of
labour force.
Shape of Phillips curve
Phillips
curve is a negatively sloped curve showing relationship between money wage rate
and rate of unemployment as shown below:
Figure 5.1
Figure 5.2
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In
this Figure no 2, 5
% rate of unemployment is called full
employment. Rate of unemployment at this position and level of money wage is
stationary.
% rate of unemployment is called full
employment. Rate of unemployment at this position and level of money wage is
stationary.
Further
economist has explanation that there is tradeoff in Phillips curve, therefore
Phillips curve will run a counter clock wise analysis.
Contribution
in the Phillips curve analysis:
Different
economist has contributed in Phillips curve analysis especially lipsey has
contributed to make a relationship to money wage rate and rate of inflation his
contribution can be explain with two reference.
Lipsey
contribution to Phillips curve:
In
lipsey contribution relationship is derived from demand and supply condition
into individual labour market. He uses new classical theories of labour market
and he explained that there is positive relationship between money wage
increase and excess demand in labour market. This function is called the
reaction function.
Figure 5.3
Second
lipsey:
Second
lipsey explain that there is a negative relationship between excess demand in
labour market and rate of unemployment as shown figure 5.4 below:
Figure 5.4
In
the lipsey contribution existence of full employment will be at that point
where no of jobs (vacancies) And number of jobs seekers both are equal. In the
above Figure UF is consider as functional unemployment and at this point excess
demand for labour is zero with the help of above 2 Figure. Lipsey has make
relationship between rates of wage increase to the level of increase in
inflation rate which is due to pressure of demand for labour in labour market.
Another
economist Bent Henson has contributed and he has defined lipsey analysis, while
defining the concept of frictional unemployment is a result of unemployment information
is the labour market.
Many
other economist also has contributed to the development of Phillips curve
analysis but the contribution of Paul Samuelsson and Robert.M.solow in 1960 had
very much popularized Phillips curve analysis. They have explain that Philips
curve can be used to explain as a tradeoff problems. They have also contributed
that Philips curve can be used as instrument of economic policy.
Author: Nasir Mehmood Ch مصنف: ناصرمحمود چوہدری
Email: Nasirmehmoodch97@gmail.com
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