Abstract
The Phillips curve views the relationship between wage rates and unemployment as asymmetric and theorizes that, because of workers' resistance to lower wages, an increase in unemployment does not lower the rate of wage growth by as much as a decrease in unemployment raises it. While this view held true in the 1960s, the experience of the 1970s and the 1980s shows that higher rates of unemployment do not seem related to lower nominal wage growth, because of the effects of rising inflationary expectations. The problem is that wage increases and interest rates largely determine the underlying rate of inflation. The solution is to create economic slack, thus putting downward pressure on real wages and therefore on nominal wages, and through nominal wages downward pressure on inflation, inflationary expectations, future nominal wage increases, and future inflation. The real test of whether inflation has been brought under control will come in 1984. The critical factor will be whether, as unemployment decreases, unions that have made concessions will try to catch up with those that did not.