The relationship between inflation and unemployment: a critique of Friedman and Phelps

Abstract

The ‘natural rate of unemployment’ was not an important part of Friedman's presidential address, although it is what the paper is remembered for. On the 50th anniversary of the paper, we argue that there is no ‘natural rate of unemployment’, and that the relation between inflation and unemployment is not the one assumed by Friedman or neoclassical theory. In Section 2 we present the conventional framework in which the Phillips curve is drawn by neoclassical economists. It emphasizes the exogenous nature of money, as well as the assumption that (a large part of) unemployment has to do with workers’ trade-off between paid work and leisure time (in a utility maximization perspective). Section 3 explains that the neoclassical framework is flawed, because money is endogenous and unemployment is not simply an outcome of workers’ choices with regard to the observed ‘equilibrium’ wage level. This section points out that inflation cannot be controlled with an interest-rate policy and that unemployment is the result of a lack of effective demand (hence it is involuntary). Section 4 provides two alternative macroeconomic analyses, one where inflation as well as unemployment are explained by the disorderly working of the banking system and another where conflict in the functional distribution of income within a monetary economy of production dominates. The conclusion offers some policy-oriented remarks as regards contemporary fiscal and monetary policies that a variety of countries have been adopting in their (largely ineffective) attempt to emerge from the crisis that erupted in 2008 at the global level – whose negative consequences still affect a relevant part of the world population.

Coupled Criticality Analysis of Inflation and Unemployment

“…In so doing, it seems that we convincingly show that the controversial issue in economics [ 8 , 9 , 10 , 11 , 12 ] about the true relation between unemployment and inflation depends greatly on the considered time scales. This means that policymakers should be flexible and sharply minded, about (their) political horizons, in imposing expansionary monetary policies given boosting production, whence employment, through consumption during and after recessions.…”

“…The controversy finds its importance when the government aims to impose an expansionary monetary policy over the economic crises. Many researchers have discussed the relation between inflation and unemployment; recall Phillips [ 1 ], Friedman [ 4 , 5 ], and many others [ 6 , 8 , 9 , 10 , 11 , 12 ].…”

“…The controversy finds its importance when the government aims to impose an expansionary monetary policy over the economic crises. Many researchers have discussed the relation between inflation and unemployment; recall one Friedman [49], among others, [50]. In this work, we were interested in large and rare fluctuations in the measures of these economic variables, in order to observe possible enhancements in themselves and in their coupling.…”

“…Thus, the true relation between unemployment and inflation and especially the causality direction between them are still serious controversial issues in economics; see for example [ 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 ] and the references therein. The debate especially finds a crucial meaning if policymakers aim to impose expansionary monetary policies to boost production during recessions.…”

Assessing inflation in CR using artificial intelligence

“…Unemployment and inflation directly affect purchasing power and thus the social status of an individual. Neoclassical economists portray the Phillips curve as exogenous nature of money as well as an assumption that much unemployment is related to an employee trade-off between paid work and leisure (Rochon and Rossi, 2018). Haskova et al (2019) state that unemployment has an impact on individuals as well as society.…”