Conflict between Employment and Inflation: Theory and Facts

Abstract

Is there a trade-off between inflation and employment? Can policymakers generate more employment through a deliberate policy of inflation? These questions have been debated at length since the introduction of the celebrated Philips Curve¹ which empirically showed a negative relationship between the rate of change in money wages and unemployment rate. The study of Philips which related to England has been reproduced for many countries. Apart from the empirical studies, there has been a growing volume of literature on the theoretical basis for such a trade-off.² Professor Tobin once described the Philips curve as ‘an empirical finding in search of a theory’,³ while there are some who regard it as a case of ‘measurement without theory’. If, in fact, there is a trade-off between the rate of change in money wages (or price level) and employment, a policy directed towards ensuring a rise in price level can be justified on the grounds of generating additional employment.