Short-Run vs Long-Run Phillips Curve

The short-run Phillips curve shows a possible trade-off between inflation and unemployment: lower unemployment may come with higher inflation. The long-run Phillips curve is vertical at the natural rate of unemployment, so it shows no lasting trade-off.

Why the curves differ

In the short run, an increase in aggregate demand can raise output and employment. Unemployment falls, but stronger demand may also push prices up. This gives the short-run Phillips curve its downward slope.

The long-run explanation adds inflation expectations: what workers and firms think will happen to prices. If inflation stays higher, workers may seek higher wages to protect their purchasing power. Firms’ costs rise, and the temporary increase in employment fades. Unemployment returns to its natural rate, while inflation remains higher. The natural rate is the unemployment that persists when the economy is not being temporarily pushed above its sustainable level of output.

For example, a government might boost demand and see unemployment fall from 6% to 4% while inflation rises. If workers then expect that higher inflation and negotiate higher wages, unemployment may return towards 6%. Repeating the demand boost would not keep unemployment at 4%; it could instead lead to still higher inflation.

Exam mistake to avoid: do not describe the downward-sloping short-run curve as a permanent choice between inflation and unemployment. Expectations can shift the short-run curve, while the long-run curve is vertical at the natural rate.

Syllabus focus: This distinction belongs to the A Level content on links between macroeconomic problems, specifically the traditional and expectations-augmented Phillips curves. It builds on the AS Level study of government macroeconomic policy objectives; policy conflicts and trade-offs are not required at AS Level.