The dilemma between inflation and unemployment is raised in economic literature by what is known as Philips curve. This means that under this model it is not possible to meet the goal of equalizing both rates to zero at the same time. You can only choose to “control” one of these economic problems, be it inflation or unemployment.

This inverse relationship was proposed under a certain empirical regularity that is described for the United Kingdom between 1861 and 1913. This model, which was popular for a certain period of time, was criticized and modified by different economists, with greater or lesser degrees. empirical correlate. 

This article first presents the original model proposed by Philips, and what was the background and reasons for its popularity. But there are also different criticisms of this relationship and modifications to the original model. Additionally, a brief analysis of said model in the Argentine economy is proposed, and as a closing note some final comments on the journey made.

The Philips curve is named after Alban William Phillips (1914-1975), in recognition of his work on unemployment and nominal wages, published in November 1958. It identifies an inverse and stable relationship between these variables. 

This is represented by a two-dimensional graph. The unemployment rate is represented on the abscissa axis, and the inflation rate is represented on the ordinate axis. The negative relationship suggests a trade-offs (exchange) between both economic phenomena. Again: to reduce the general increase in prices, it is necessary to sacrifice some employment, and vice versa.

The elaboration and theoretical justification of Phillips' empirical finding was not carried out by Phillips himself, but is based on a paper by Richard Lipsey in 1960. And reinforced in that same year by a work by Robert Solow and Paul Samuelson published, in which they also identified a negative relationship between inflation and unemployment for the United States and named the curve as such for the first time. 

Of course this model had criticism both from a theoretical and empirical point of view. Precisely the international context of the 70s breaks the aforementioned inverse regularity between inflation and unemployment, because both high inflation and unemployment rates occur in a new phenomenon called stagflation. From a theoretical point of view, the critiques of Friedman-Phelps are reviewed first, then the contributions of Lucas-Sargent and finally the comments of Tobin. 

The empirical correlate in Argentina It can be traced back to 1974, the date of the first official data. The series from 1974-2021 is presented, which covers different political regimes, and even different monetary signs. As a technical note, to project the trend line emerging from the observations, a second-order polynomial trend line was used. It is a curved line that is used when the data fluctuates, and that has the particularity of having a single peak or valley. It is the approximate equivalent to the shape of a parabola.

In general terms, both annual and quarterly data they seem to match on the empirical regularity of the Philips curve. However, for the graph to fit the theory, the right tail of the curve should not increase. This is possibly due to the existence of periods of stagflation; recurring situation in recent years and -especially- during the 80's.

On report We review in more detail both the theoretical and empirical elaboration, as well as each of the criticisms discussed. And different subperiods for the Argentine economy are also analyzed. We invite you to read the full report to learn in detail about the Philips Curve.