Inflation May Be Causing a Long-Term Rise in Unemployment

by Karl-Friedrich Israel

One of the most discussed topics in modern macroeconomics is the alleged trade-off between price inflation and unemployment. The Phillips curve became, in one form or another, the linchpin of modern monetary policy since the 1960s when Nobel laureates Paul Samuelson and Robert Solow presented the curve as a politically exploitable “menu of choice”: either high price inflation and low unemployment, low price inflation and high unemployment, or any point in between the extremes — just like that, à la carte.

Economists Milton Friedman and Edmund Phelps argued against this naïve interpretation, which has since then established firm roots in public discourse. They explained the trade-off as a short-run phenomenon. When expansionary monetary policies lead to unexpected price inflation, employment can be stimulated if indeed wages increase slower than other prices in the economy.

Continue Reading at…