Says that as unemployment goes down wages and inflation go up.
Ie, there’s a dynamic balance between unemployment, wages, and inflation.
Here Joe Blogs applies the Phillips Curve to Russia’s officially reported data.
The Phillips Curve might also apply to US?
We’ve had low unemployment for a while.
The Fed has been manipulating the Fed rate in order to control inflation.
But, the Phillips Curve says there’s a balance between unemployment and wages, and therefore, inflation.
Back in 2022, Powell said unemployment would have to rise to 5% or so, in order for inflation to stabilize at the 2% target.
The Phillips Curve is, like so much of mathematical economics, extremely quasi in its theoretical origins. It “makes a kind of sense”, but ignores far more complex reality.
And crucially, the “kind of sense” it makes is that workers power in the economy ought be blunted so as to beat inflation, rather than bothering the wealthy or otherwise powerful.
We have been hearing that narrative in the media: the notion that, to curtail inflation, Proles need to be put out of work, so that wages can be cut. Meanwhile, Ford released the pricing for the 2025 Lincoln Navigator. The base price went from $83,265 in 24, to $99,995 for a 2025.
I didn’t say Ford was competent at it. The company is being eaten alive by warranty claims, because they are building poo
Stellantis has been much more successful at leveraging the “shortage” and “supply chain disruption” narratives, post-plague, to gouge the living daylights out of their customers, until now.
Global warranty claims, as a percent of sales, by manufacturer. Notice that Ford’s warranty claims are significantly higher than Stellantis. Notice, also, that VW’s claims are even higher than Ford’s. VW has been issuing earnings warnings, and threatening to close plants in Germany. Ford, Stellantis, and VW have all been working the same plan to reduce quality, and increase price, to fluff up profits.
Hmm, if 12-13% margins at Stellantis is “gouging the living daylights out of their customers” then what margins would you say are acceptable such that you wouldn’t consider it extreme “gouging” of the customers?
Of course, Stellantis is a European company, so perhaps they normally expect higher margins than US auto companies? But they don’t seem to be exceeding Ford by very much if anything.
Look at the chart for Stellantis pre-plague. 5-6% operating margin has been the norm across the industry.
Most of Stellantis’ loot recently has been coming from North America. Recently, their poor quality and rising prices has come around to bite them in the backside, hence the earnings warning, as operating margin starts to return to pre-plague normal.
Not knowing what the Phillips Curve was about I asked Google who sent me to Investopedia who has an absurd explanation:
“Increasing inflation decreases unemployment, and vice versa.”
If A causes B then B cannot be the cause of A so NO vice versa
Inflation is about money Unemployment is about labor
The Phillips Curve deals with the same topic as does Karl Marx. Take out the ideology and Marx’s Das Kapital is reduced to one word, “Surplus.” The dialectic is reduced to discovering how much each contender, Labor and Capital, contributes to Surplus. According to Marx, Labor produces the Surplus and Capital steals it. An ideological debate about this opinion ia about as useful as debating the number of ballerinas that can, comfortably, perform, simultaneously, on the head of a pin.
Adam Smith illustrated how specialization increases the productivity of labor in the manufacturing of pins. What he left out of the illustration is the implicit use of trade to enable specialization. The scale of trade inside a factory might be minuscule but it is the kernel of trade.
Joint Stock Laws enabled the concentration of capital needed to fund giant ventures like the East India Companies of the 17th Century that accelerated world wide trade and economies.
Labor and Capital go together to create Macro Economies. This debunks Karl Marx’s opinion about the creation of surplus. The issue is solely about its equitative distribution.
What Investopedia meant (and expressed poorly) is that higher inflation is correlated with lower unemployment while lower inflation is correlated with higher unemployment.
Causal vice versa is possible. The number of prey will cause a change in the number of predators. The number of predators will cause a change in the number of prey. The actual causal relationship depends on timing.
If one doesn’t cause the other then the correlation will only be seen under certain conditions. For example, lowering the prime interest rate might be expected to increase inflation and lower unemployment thereby giving the predicted correlation. In comparison, higher oil prices due to war would likely increase inflation and increase unemployment.
More generally, inflation and employment can be said to be impacted by factors that incompletely overlap. Factors within the overlap result in a correlation. Those outside do not.
IMO, the recent inflation was due to a combination of government stimuli, supply chain disruptions, and unbalanced demand due to the pandemic (e.g., delayed travel, working at home, etc). These impact in complicated and often opposing ways. Because of that complexity, I am skeptical about the Phillips curve applying to the current situation.
Mostly yes to all these posts on my comments on the Phillips curve, especially the Captain’s detailed take down. My only disagreement with him is his statement
Given Marx’s deep embrace of Hegelian mysticism, I would use the word “religious jibberish” in place of the word ideology.
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(who is a ferociously anti-Marxist Social Democrat, and in 1970 had the bruised jaw and bloodied knuckles to prove it).
Why not? If I increase the temperature of a gas (other things being equal) the pressure will increase. The rise in temperature causes the rise in pressure. Similarly, if I increase the pressure of a gas, then the temperature will increase. The rise in pressure causes the rise in temperature.
Leaving that aside, the lengthy and extended period of very low inflation and very low unemployment (relative to historic norms for both) during the early 2000’s kind of kicked the Phillips Curve in the teeth a bit. Back in the Old Times in the Long Ago when I got my economics degree, the macro instructors were all about the tight relationship between unemployment and inflation - and NAIRU. Remember NAIRU? Yeah, not so much any more…
Good points! In the second case, since ‘we’ applied the energy (temperature or pressure), we can know the cause and the effect. In the first case we cannot know the cause unless we know what caused the cause (the prime mover). In the case of the Phillips Curve all we can tell is that there is a correlation because the system is too complex to backtrack to the prime mover.
