The end of the Phillips Curve?

Posted on

It was long held (although often disputed) that there was an inverse relationship between pay rises and employment. This was explained by something called the Phillips Curve which held that lower unemployment was linked to higher rates of inflation, and of course, vice versa.

Today unemployment rose by 70,000 to 2.56 million.

And pay increases have fallen to 1% - way below headline inflation of 2.8%.

Both are a disaster, individually for all impacted - because both spell the end of hope - but also for the economy as a whole.

Increasing unemployment means the government misses its targets by ever wider margins, and so will inevitably (given the lunatic approach this government adopts) give rise to yet more calls for austerity, despite the warnings of the IMF.

And the declining purchasing power of people will mean the chance of any economic stimulus arising from consumer spending recedes yet further into the distance.

The case for Plan B grows stronger by the day. But the Tories want to trash the economy - as a matter of policy - and I fear trash it they will. There is no other explanation for what is happening. Thatcher did it and they think it worked for her. They are intent on doing it again.

In the meantime, I think we can safely say that the Phillips Curve no longer holds. A point I think Martin Wolf has also noted.