IS THE PHILLIPS CURVE DEAD?
A. Joyce Furfero, Ph.D., J.D.
The Dismal Scientist, 2 Mar 1999
No, the Phillips curve is not dead --- it has just changed position over the years.
First of all, the short-run Phillips curve shifts over time due to irregular changes in productivity and factors which affect productivity. Phillips originally measured wage inflation against the unemployment rate. The difference between wage inflation and price inflation is the rate of growth of productivity. As productivity growth increases, price inflation decreases. As productivity growth decreases, price inflation increases.
In the 1960s and 1970s, productivity growth slowed and the rate of price inflation increased at each and every unemployment level. In the 1990s, productivity growth increased and the rate of price inflation decreased at each and every unemployment level. Some factors which reduced productivity growth in the 1970s were the two oil crises, increased regulation of business that made investment less profitable, and mandated investment in non-capacity increasing capital like pollution controls and OSHA-mandated safety controls.
Second, the long-run Phillips curve shifts over time due to changes in the rate of growth of the labor force and the amount of natural unemployment in the economy. Natural unemployment consists of frictional unemployment, structural unemployment, and induced unemployment.
Frictional unemployment changes as the rate of entry into the labor force and the quit rate change. As the rate of entry into the labor force and the quit rate increase, frictional unemployment increases.As the rate of entry into the labor force and the quit rate decrease, frictional unemployment decreases.
Starting in 1964, when the first "baby boomers" graduated form high school, the frictional component of natural unemployment began to increase. By 1986, after the last of the "baby boomers" graduated from college, the frictional component of natural unemployment began to fall. Also, during the period 1968-1986, the rate of growth of the labor force increased because more women entered and remained in the labor force. Finally, unlike their parents, "baby boomers were less satisfied to stay with one employer and moved from job to job with greater frequency. They were fed high hopes that a college education would give them upward mobility and when they did not move up the corporate ladder as fast as they expected, they quit their jobs and went looking for better economic opportunities. As a result, the quit rate component of frictional unemployment increased and so did the natural unemployment rate.
Structural unemployment changes as the rate of technology changes. As the rate of change in technology increases, structural unemployment increases. As the rate of change in technology slows, structural unemployment decreases. The rate of change in technology can affect either the composition of the final output (new products are produced) or the method of producing goods and services (automation, electrification, computerization and robotization). In both cases, workers are left with obsolete skills. Re-education and retraining take time. In the interim, the pool of structurally unemployed persons increases.
The pool of structurally unemployed persons started to grow in the 1950s with automation and electrification of production processes. The pool got larger in the 1960s and 1970s with the introduction of the computer. Subsequently, people trained for new jobs in the computer areas and the pool of structurally unemployed decreased.
Also, in the 1950s, 1960s, and early 1970s, most students went to college for a degree, but the degrees did not necessarily guarantee that their skills were suitable for the available jobs. Today, college students are more career oriented and they select majors that are especially targeted for the job market. A better match of properly skilled job applicants with job vacancies reduces structural unemployment and the natural rate of unemployment.
Induced unemployment changes as the governments' safety net programs change. As the government provides bigger safety net for unemployed persons, induced unemployment increases. As the government reduces these benefits, induced unemployment decreases. Since working is disutilitarian and people prefer leisure to work, they are more willing and able to remain unemployed and live off the dole when the level of government benefits is high and the opportunity cost of not working is low. The are forced to go back to work when the level of government benefits is reduced and the opportunity cost of not working rises.
During the 1960s and 1970s, governments at all levels sought to increase the level of benefits in the safety net. This increase in benefits increased the pool of induced unemployment. Starting with President Ronald Reagan's "New Federalism," which shifted the burden of providing benefits back to the States, and the elimination of the agricultural price support system, benefit levels were slowly reduced and induced unemployment began to decline. Today's "work for welfare" programs are further reducing this pool and the natural rate of unemployment.
As a result of the above, the short-run Philips curve shifted out to the right and the natural rate of unemployment increased from the 1950s to the early 1980s. Since the mid-1980s, the Phillips curve and the natural rate of unemployment had been shifting down to the left. If and when the factors underlying productivity growth change and changes in the rate of labor force participation, technology, job satisfaction, and the level of government benefits change, then the Phillips curve will shift accordingly.