Definition
The Phillips curve describes an observed relationship between inflation and unemployment. In its original form, it suggested that lower unemployment came paired with higher inflation, implying that policymakers faced a stable trade-off between the two.
Modern economics treats the curve as having two faces. In the short run, a downward-sloping trade-off can appear. In the long run, the curve is vertical at the natural rate of unemployment, meaning no permanent trade-off exists.
Why it matters
How it works
In the short run, sticky wages and expectations let a demand boost lower unemployment while pushing inflation up, tracing a downward slope. The trade-off holds only while inflation outruns what people expected.
Once workers and firms revise their expectations to match actual inflation, they adjust wages and prices, and unemployment returns to its natural rate. The long-run curve is therefore vertical: any inflation rate is compatible with the same natural unemployment rate, so the trade-off is temporary.