Introduction
The rate of unemployment and inflation determines the stability of any economy. Thus, inflation and unemployment are the major economic issues in any given economy and a business cycle, as they indicate the economic performance of a country. However, it is not easy to maintain low unemployment and inflation at the same time, especially in the short-run. Thus, the trade-off between inflation and unemployment is inevitable, and countries must strike an effective balance between the two economic concepts to enhance the economic stability of a country ( Omerčević & Nuroğlu, 2014) . Many studies, therefore, have been done to understand the relationship between inflation and unemployment. However, it was the analysis that was done by economist A.W. Phillips that shaped the way economists view the relationship between inflation and unemployment. Thus, understanding the relationship between the two concepts is essential to improve economic growth and development.
The Historical Relationship between Unemployment and Inflation
The history of the relationship between unemployment and inflation can be traced back to 1958 A.W. Phillips, one of the renowned economics, developed what is popularly known as the Phillips curve. Phillips curiously wanted to know the relationship between inflation and unemployment. As a result, he collected and analyzed wage changes and unemployment changes data, especially between 1957 and 1961 ( Omerčević & Nuroğlu, 2014) . He relied on the data from Great Britain to conduct his analysis. Interestingly, Phillips found that there is a negative or inverse relationship between wages and unemployment. According to Phillips, the inverse relationship was not only seen in Great Britain but also in other developed countries in the world. Phillips, therefore, concluded that there is a stable inverse relationship between wages and unemployment.
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The analysis by Phillips, however, did not specify the relationship between inflation and unemployment. Thus, in 1960, Paul Samuelson and Robert Solow took the initiative to expand Phillips’ findings by focusing on the relationship between inflation and unemployment ( Omerčević & Nuroğlu, 2014) . However, unlike Phillips, who relied on data from Great Britain, the two economists used data from the USA, especially those that were collected between 1960 and 1990. Like Phillips, Samuelson and Solow found an inverse relationship between employment and inflation. The findings by the economist confirmed a stable non-linear relationship between the two important economic indicators. Consequently, the line curve explaining the relationship between the two variables is popularly known as the Phillips Curve.
Nonetheless, findings by Phillips, Samuelson, and Solow did not go unchallenged. A group by economists called monetarists challenged Phillips Curve, especially based on a long-run basis in the late 1960s ( Bildirici & Turkmen, 2016) . The group that was led by Milton Friedman and Edmund Phelps specifically argued that the Phillips Curve could only apply to the short-run but not long-run. According to monetarists, in the long-run, the economy always reverts to the natural rate of unemployment while at the same time, it is adjusting to suitable inflation ( Bildirici & Turkmen, 2016) . Besides, the group explained that the government cannot sustain the unemployment rate at a certain level. The rebuttal or counterargument by monetarists resulted in the short-run and long-run Phillips Curve.
Also, the validity of Phillips Curve was challenged in the 1970s when the US economy experienced both high unemployment and high inflation rates, which contradicted Phillips’ findings and arguments ( Omerčević & Nuroğlu, 2014) . Therefore, based on the US experience, inflation and unemployment rates can move in the same direction, especially when an economy is impacted by external forces significantly. For instance, in the 1970s, the US economy was largely affected by a surge in oil prices, which increased non-labor costs. As a result, companies were forced to increase the prices of their products and services. However, dispute the contrary arguments, the relationship between inflation and unemployment is still based mainly on the Phillips Curve.
Differences between Short-run and Long-run in a Macroeconomics Analysis
The macroeconomic analysis is subdivided into two major parts, including the short-run and long run. The division in macroeconomic analysis emerged in the 1930s when the world was experiencing the Great Depression, which affected almost all economies globally. The depression force to conduct an analysis that was intended to predict short-term and long-term macroeconomic behaviors or trends. The difference between short-run and long-run macroeconomic analysis, therefore, refers to the time or period over which prices of various commodities can either be flexible or can easily be adjusted ( Nguyen, Sun & Anwar, 2017) . Specifically, the short-run macroeconomic analysis refers to the period under which the prices of wages and other commodities do not significantly respond to economic changes or conditions in a given economy. In the short-run, prices of products and services, as well as wages, do not adjust to the new equilibrium. A sticky-price or what is popularly known as slow-to-respond prices, therefore, occurs in the short-run ( Nguyen, Sun & Anwar, 2017) . Sticky prices can result in either a shortage or surplus.
However, long-run macroeconomic analysis refers to a period where both wages and prices are flexible, forcing the employment rate to move towards a natural level. Unlike short-run macroeconomic analysis, input prices have enough time to adjust ( Nguyen, Sun & Anwar, 2017) . It is in the long-run that prices of commodities are believed to be responsive to aggregate demand and aggregate supply. Besides, in the long-run, both labor and capital can freely move within the economy, as well across national borders ( Schubert & Turnovsky, 2018) . Also, the long-run macroeconomic analysis is a period where firms or businesses can comfortably plan for future activities. Thus, there are many differences between short-run and long-run macroeconomic analysis.
Therefore, the relationship between inflation and unemployment is different in the short-run and long-run because of the ability of the price of commodities to adjust. The inverse relationship between the two variables is possible in the short-run because prices do not adjust to the new equilibrium. The stickiness of prices helps in maintaining the inverse relationship between unemployment and inflation ( Nguyen, Sun & Anwar, 2017) . Conversely, in the long-run, the prices of commodities, as well as wages, are influenced by many factors, making the relationship unattainable. For example, in the long-run, the relationship between the variables can be distorted by an increase in the price of non-labor commodities due to external forces like a surge in oil prices, which ends up affecting almost all sectors of an economy. Besides, the relationship is different because both countries and businesses can adjust in the long-run ( Schubert & Turnovsky, 2018) . As a result, the Phillips curve can only be maintained in the short-run but not in the long-run.
Recent 20-year US Unemployment and Inflation Data and Short-run Philips Curve
The relationship between unemployment and inflation is expected to be inverse, mainly based on the short-run Phillips curve. According to the US unemployment and inflation data, primarily between 1998 and 2018, the stability of the country’s economy has been fluctuating. The data proves that the economy has been experiencing booms and recession since 1998. The unemployment and inflation data largely confirm the short-run Phillips curve because they indicate the inverse relationship between the two variables. For instance, the data between 1998 and 2000 confirm the inverse relationship between unemployment and inflation. The average unemployment rate of the country reduced from 4.4%, 4.0%, and 3.9% while the rate of inflation increases from 1.6%, 2.7%, and 3.4% in 1998, 1999, and 2000 respectively ( Amadeo, 2019) . The data show that a decrease in the unemployment rate increased the rate of inflation. The same trend could be seen between 2003 and 2005.
However, the unusual trend could be seen between 2012 and 2015 where unemployment and inflation showed a positive relationship. Both the unemployment and inflation rates decreased between 2012 and 2015, contradicts Phillips’ argument that unemployment and inflation are inversely related ( Amadeo, 2019) . Three years is a long period for the two variables to move in the same direction. Therefore, the data provide a mixed view of the short-run Phillips curve. However, the relationship can be influenced by other economic factors. The data largely confirms that unemployment and inflation have an inverse relationship, even though they depict some unusual trends.
Why the Data Approve or Disapprove Short-run Phillips Curve
The US 20-year unemployment an employment data confirm while at the same time disapprove short-run Phillips curve. Many economic factors influenced the trends in the data. For instance, the USA economy faced many economic challenges between 1998 and 2000, which ended up influencing unemployment and inflation rates. The USA economy was faced by the Long-Term Capital Management (LTCM) hedge crisis that ended up affecting almost the entire economy ( Amadeo, 2019) . Consequently, the Fed was forced to intervene by lowering the Feds fund rate, increasing inflation. The crisis also affected the banking sector significantly, leading to a decline in employment in the industry. As a result, the unemployment crisis affected both inflation and unemployment in 1998. At the same time, the USA was affected by the introduction of the Euro in 1999. The introduction of the Euro led to a significant decline in the real interest rates not only in Europe but also in the USA, leading to an increase in inflation ( Amadeo, 2019) . As a result, both internal and external factors influenced the relationship between unemployment and inflation significantly.
Also, the intervention that was taken by the US governments between 2003 and 2005 confirmed the short-run Phillips curve. For instance, to address the economic recession that started in 2001, President Bush administration enacted The Jobs and Growth Tax Relief Reconciliation Act, which was primarily aimed at reducing the investment tax ( Amadeo, 2019) . Specifically, the Act reduced capital gains tax, and it increased tax deductions, especially for small businesses. Consequently, the level of unemployment reduced while inflation increased. The Act was intended to stimulate the economy, leading to increased inflation. Also, to boost economic growth and address recession, the USA adopted the expansionary monetary policy in 2004, which resulted in increased inflation, whereas it reduced the rate of unemployment in the country ( Amadeo, 2019) . Thus, the economic interventions and some of the crises influenced unemployment and inflation rate, confirming the short-run Phillips curve. Moreover, economic factors caused the unusual relationship between unemployment and inflation between 2012 and 2015. For example, in 2013, the stocks had the strongest performance since 1997, and it influenced various economic activities.
The Validity of Phillips Curve
The validity of the Phillips curve has been a major concern, and this started right when it was formulated. First, the scenario that occurred in the USA where both inflation and unemployment increased in the 1970s showed that countries cannot absolutely rely on Phillips Curve to resolve issues of unemployment and inflation ( Dotsey, Fujita & Stark, 2017) . Effective trade-offs between unemployment and inflation can only be effective when economists and the country understand the relationship between the variables. However, Phillips’ argument that inflation and unemployment have inverse relationships failed the test a few years after it had been formulated or developed. Besides, the problems of unemployment and inflation need long-term and sustainable solutions. However, economists like economist Milton Friedman Phillip Curve can only be valid in the short-term but not long-term. Thus, with the increased complexity of modern economies, the Phillips Curve alone cannot be used to resolve today’s inflation and unemployment issues.
At the same time, the suitability of the Phillips Curve to forecast unemployment and inflation has been studied and explored by various economists. Unfortunately, findings from various studies reveal that the curve cannot accurately be used to forecast unemployment and information. The study that was done by Dotsey, Fujita & Stark (2017), for instance, found that the Phillips Curve can accurately help in predicting unemployment and inflation only when an economy is weak or unstable. On the contrary, it is less accurate when a country has a strong economy. Moreover, the curve cannot accurately be used to forecast unemployment and inflation because it is not based on a cause-and-effect relationship. The relationship between various economic indicators or variables is increasingly becoming complex, reducing the effectiveness of the Phillips Curve in forecasting inflation and unemployment.
Recommendation
To create effective trade-offs between inflation and unemployment, government economists and Feds should only use Phillips Curve as a guideline but not as an absolute economic tool to resolve inflation and unemployment issues, as well as to predict the variables. Alternatively, the Fed should react to inflation and employment issues more infinitely without paying much attention to the relationship between wages and inflation ( Dotsey, Fujita & Stark, 2017) . The government should take a holistic approach to address the problems of unemployment and inflation. Importantly, economic policymakers should use real-time data and information to predict inflation and employment, leading to enhanced economic stability ( Dotsey, Fujita & Stark, 2017) . Integrating various approaches and models, as well as the Phillips Curve, can help in resolving current unemployment and inflation issues in the USA significantly.
Conclusion
Phillips Curve played a critical role in understanding the initial relationship between inflation and unemployment. It was Phillips’ work that motivated other economists to explore the relationships between the two variables. However, currently, especially in stable economies, the Phillips Curve may not effectively be used to resolve unemployment and economic issues. The curve may only be effective and accurate in the short-run but not in the long-run. Thus, it should largely provide a benchmark or framework for understanding the relationship between unemployment and inflation. The economic analysis involving inflation and unemployment should incorporate other economic factors. The use of real-time data can also assist in predicting the relationship between the two variables. Different approaches and methods can enhance the understanding of unemployment and inflation issues.
References
Amadeo, K. (2019, October 2). Unemployment Rate by Year Since 1929 Compared to Inflation and GDP. The Balance . Retrieved from https://www.thebalance.com/unemployment-rate-by-year-3305506
Bildirici, M., & Turkmen, C. (2016). New Monetarist Phillips curve. Procedia Economics and Finance , 38 , 360-367.
Dotsey, M., Fujita, S., & Stark, T. (2017). Do Phillips Curves Conditionally Help to Forecast Inflation? International Journal of Central Banking , 3(1), 43-92.
Nguyen, D. T. H., Sun, S., & Anwar, S. (2017). A long-run and short-run analysis of the macroeconomic interrelationships in Vietnam. Economic Analysis and Policy , 54 (1) , 15- 25.
Omerčević, E., & Nuroğlu, E. (2014). Phillips and wage curves: empirical evidence from Bosnia and Herzegovina. Economics Research International , 1 (1), 1-7.
Schubert, S. F., & Turnovsky, S. J. (2018). Growth and unemployment: Short-run and long-run trade-offs. Journal of Economic Dynamics and Control , 91 (1) , 172-189.
