Figure 3. The unemployment - inflation space 1950-2001, Holland
Figure 4. The Netherlands, ‘official unemployment’ (drawn) and ‘not working’ (dashed)
Above rough division in decades suggests, as said, some ‘trade-off’. There is a discussion among economists whether such a ‘trade-off’ really exists, and in particular for the short run, but, with this division in decades, it cannot be denied that there are some systematic choices involved. Our object of study, stagflation, can be rephrased by observing that the Phillipscurve apparently has shifted to a higher and unfavourable position.
The authors Okun (1981), Hebden (1983), Blanchard & Fischer (1989), Friedman (1991), Phelps (1994) help to put the Phillipscurve in perspective. Extensive empirical work has been done by the Central Planning Bureau (1992a&b).
Okun (1981) emphasises the stability of the US Phillipscurve over the 1954-1969 period, but accepts that wages and prices thereafter are less flexible in the short run, due to ‘implicit contracts’ and ‘invisible handshakes’. Referring to Friedman and Phelps he notes: “In the sense that all economists must recognize that adverse shift of the short-run Phillips curve, they have all become accelerationists now (to reverse Friedman’s celebrated concession to Keynes).” (p239). Rather than getting lost in finding proper functional formats, Okun concentrates on formulating various elements that are important for policy making, indicating that a whole range of instruments must be used. The minimum wage gets short mention, but is not considered in relation to the Phillipscurve.
Hebden (1983) gives a recommendable review of econometric issues and empirical work (till that time) on the Phillipscurve, including (a) the original article by Phillips, (b) papers that remain close to his format, and (c) papers that include trade union influence and price expectations. Hebden notes:
“Models that seek to explain the causes of the inflation that has been experienced in the recent past, and hold out the possibility of helping economists to predict and maybe control inflation in the future, are sought after eagerly by economists and politicians. Many models have been produced and a fair degree of unanimity has been found as to the mechanics of the relatively mild inflation experienced in Britain in the 1950s and 1960s. But when inflation accelerated, in this country as in most of the industralised world, in the mid-1970s, those models were unable to cope; and though almost a decade of ‘hyperinflation’ has passed since then, no model that adequately explains its causes has yet been found.” (p158)