Why Inflation Stays Low Even Though Unemployment Is Down

To long-time baseball fans, the Phillips Curve sounds like a tribute to Lefty Phillips, the Los Angeles Dodgers pitching coach who helped Hall of Famers Don Drysdale and Sandy Koufax win National League pennants and a World Series title in the 1960s. 

The Phillips Curve is actually named after A.W. Phillips, a New Zealand-born economist who in 1958 noticed that wage growth is strong when the jobless rate is low. (Yes, kind of obvious to the layman.) American economist Paul Samuelson later made a bolder restatement of the Phillips Curve, saying that overall inflation—not just wage growth—is higher when labor markets are tight.

Except the Phillips Curve hasn’t behaved lately. The unemployment rate in November was just 4.1 percent, which should have been enough to set off a bidding war for talent, driving up wages and the overall price level. Yet inflation in November was just 1.8 percent, according to the measure that the Federal Reserve tracks, the yearly change in the price index for personal consumption expenditures. Stripping out volatile food and energy prices, inflation was just 1.5 percent. Both figures are below the Fed’s target inflation rate of 2 percent.

Economists have struggled to explain this mystery. Some have simply declared the Phillips Curve dead. But that seems extreme. Everything we know about markets says that when a commodity such as labor is in short supply, its price should go up.

One partial explanation is that the unemployment rate isn’t a great measure of the tightness of the labor market. True, the number of people who are unemployed and actively seeking work has shrunk. But the pool of unemployed is not the only source of new hires. As this chart shows, most people who start working in any given month weren’t even counted as unemployed the month before. They might have been in school or the armed forces or prison or just on the sidelines, not actively seeking a job. This source of new hires has become increasingly important in recent years as the unemployment rate has fallen.

Data: Bureau of Labor Statistics

The question then becomes, how many more people are still outside the labor force but available for work? The best indicator of that is the employment-to-population ratio. It’s simply the the number of people who are working as a share of the entire population. (Benn Steil and Benjamin Della Rocca wrote about this for the Council on Foreign Relations recently.)

As the following chart shows, the employment-to-population ratio fell sharply in the 2007-09 recession. It has begun to spring back but remains below its pre-recession peak, indicating that slack remains. Granted, the ratio is unlikely to get all the way back to where it was in 2007 because the Baby Boom is aging: a smaller share of the U.S. population is of traditional working age. It’s also true that some people who lost jobs are never getting them back because they’ve lost skills or motivation or contacts in the working world. But the employment-to-population ratio can probably get higher than it is now.


A skeptic might ask at this point whether the Phillips Curve inflation tradeoff works any better for the employment-to-population ratio than it does for the unemployment rate. In other words, do we really see inflation rising when the ratio goes up, indicating fewer people are available for work? The answer is no at first glance, but yes on closer inspection.

I went back to 1961 and looked at the correlation between inflation and the E/P ratio. The relationship was slightly negative, which seems to refute what I’ve been arguing. But then I looked separately at each business cycle and contraction over the period. While there were variations, by weighting the expansions and contractions by their duration I found that on average prices did tend to rise faster when employment was rising as a share of the population and to rise more slowly when employment was falling as a share of the population. This table sums up:

Data: Bureau of Labor Statistics

I suspect that the negative result over the entire period is the result of long-term trends that have nothing to do with the Phillips Curve. More women have entered the workforce since the early 1960s, which has raised the employment-to-population ratio. Meanwhile, the inflation rate has trended downward since the late 1970s because of better Federal Reserve policies, among other factors. Over the entire period, those two powerful factors mask the Phillips Curve. But the curve still shows up over shorter periods. 

Lefty Phillips could have told us as much: The curve is still useful even if it doesn’t always go over the plate.

    Peter Coy
    Bloomberg Businessweek Columnist

    Peter Coy is the economics editor for Bloomberg Businessweek and covers a wide range of economic issues. He also holds the position of senior writer. Coy joined the magazine in December 1989 as telecommunications editor, then became technology editor in October 1992 and held that position until joining the economics staff. He came to BusinessWeek from the Associated Press in New York, where he had served as a business news writer since 1985.

    More From this publisher : HERE ; This post was curated using : TrendingTraffic


  1. Lose weight now We mean this seriously We are here to help you successfully
  2. Have Fun Making Yummy, Gourmet Tasting, Gluten-Free, Meals the Quick and Easy Way.
  3. The half day diet,trick your ody into burning fat while you eat yummy carbs every day.
  4. Alternative And Natural Therapies For Itp. Herbal Remedies To Increase Low Platelet Levels
  5. The Best Kids Low GI Recipes for Chocolate Treats
  6. How Thousands of Type 2 Diabetics have Transformed Their Illness in Record Time
  7. Enjoy the Freedom and Extra Money That Running Your Own Gift Basket Business Can Bring
  8. Over 8 Top Ranked Hypnosis Certification Courses And Programs
  9. Clickbank Ads

    If you like our content help us with a share… or two …  

    Also -  I have some free stuff for you .......

    Nr 1. In This FREE Report you can Discover:

    Secrets to acquiring the freshest, hottest leads via YouTube In-Stream ads quickly and easily! Best secret tips for the most effective targeting for your ads! Totally legal, but little-known method for literally stealing traffic from your competitors! Get more traffic to your videos and landing pages without spending a fortune! And much more - all within this special FREE report!


    Nr 2. Did you know you can Absolutely EXPLODE YOUR EMAIL LIST FOR FREE with UNTOUCHED offline sources?


    Nr 3. The #1 secret to becoming an affiliate superstar - Earn your first $100 online – without a dime to invest.

    If you’re still looking to “make it online – I have just the thing for you. It’s a video series that shows how to make your first $100 online – even if you don’t have a dime to invest. Yes – nothing.  Free.  Nada. Is this possible? You bet. It’s the most powerful system used by those “in the know”. Good things don’t have to be difficult. And they don’t only come to those who wait. Have A Look


    Nr 4. Top 10 Email Marketing Mistakes. Which of these mistakes do you make?


    Nr 5.  You can learn about : The hottest social networking site that will send an unlimited stampede of traffic to your site - for FREE! How to quickly locate a swarm of hungry buyers using "information portals"! The fast and easy way to use simple images to siphon targeted traffic, on command! Learn how to get the most possible traffic from Instagram, and make sure that traffic converts! And much more ...


    Nr 6. It’s no secret… Facebook is an incredible place to get tons of free, viral traffic. But… most people are going about it all wrong.  How many of these mistakes are you making? Download the free report to find out.


    Nr 7.  Special free report .  It's called "Operation Midas Touch" and you can download it here...

    The report features a surefire method for generating at least $1000 per week online,without a website or product of your own!

    Nr 8.  Instagram is still one of the hottest ways to get a LOT of traffic fast. All by sharing images. Sounds easy enough, yeah? Well, yes and no. If you want to really start driving a lot of  traffic and making sales using Instagram then you should download this report.

    Nr 9.  When it comes to creating a product online there are so many ways to approach it. Wouldn’t it be great to just get the meat of it all so you can get started faster? Well, the good news is, today you can download a guide called the Product Creation Formula Quickstart Guide. It’s as the title suggests - a Quickstart guide. You’ll get a list of action steps to take right away. Download your copy today !

    Nr 10. Would you like to finally USE all of that dusty PLR you have sitting around on your harddrive? Or maybe find the resources for the best PLR available - at the best prices? What about how to use that PLR to make you money with just a few minutes of work. Well, you’re not going to want to miss this!

      Nr 11. Buzzfeed’s top post has more than 21 million views. Think about that for a sec… ONE of their articles has had over 21 million people who have read it! And they have thousands of articles... what would you do with that kind of traffic? A friend of mine hacked their method and was able to use it to get 11,592 targeted new subscribers in 2 weeks on their very first attempt!

    Nr 12. Push notifications are one of today's hottest trends in website traffic and conversions, and for good reason. Studies have shown that as many as 40% of people will opt-in for push notifications, which is about TEN TIMES the rate of people who opt-in for emails! That’s huge! Not only that, but they're also highly effective at pulling clicks, as well. Some studies have shown CTR at an average of around 40%, with highs of as much as 80%! Again, that’s huge!

    Nr 13. Would you like to know how to get more money from the exact same number of website visitors you’re currently getting? Even if you’re website is getting as few as 1-2 visitors a day, this report will show you how to increase your profits using these few handy hacks.

    Nr 14. People have now realised that it's not the size of the list which matters, it's the quality. ... and the only way to create a quality list is by launching your own products. Let it be $7 ebooks, $17 info products, $27 video training product or software's... all of these work. My good friend Kevin Fahey has is revealing how he's launched over 20 products in the past 4 years, many of them top sellers. Needless to say he's banked a handsome amount in this time.

    Nr 15. Do you ever feel that the man you like or even love, just doesn't see you or desire you in way you want him to? Or... maybe you're able to get a man's attention though not the right kind of attention? Or... maybe you're still single because you wait and wait for men to approach you first? What you may not know is that the way we flirt will either attract the "wrong" man for us or the "right" man.

    Nr 16. When it comes to getting sales and leads online, there is ONE thing that 95% of marketers use... it's called a LIST. My friend Jimmy just released a free book that explains WHY a list is important and how YOU can build your own list. It's available right here (and it won't cost you a penny)

    Nr 17. If you have tried everything, and still aren't able to get your Ex back, then you need to pay attention.

    Nr 18. What if I told you that you could make ANY woman WANT to do ANYTHING for you? Would you think I'm crazy? Well... what If I told you that you could also make her LOVE every minute of it and come back for more?


    Nr 19. I have a special free plugin for you today. It's called "Covert Hover Mini"

    This plugin will triple your blog traffic by compelling your visitors to share your images on social media. This is some really clever stuff and it works like a charm. After you grab your free plugin, don't  forget to read the free bonus report as it will show exactly how and why this strategy works like crazy.

    Nr 20. The days of being able to get away with a basic WP theme and a pic or two are gone, your site needs to look good. Even Google are looking for you to have engaging graphics on your site. But getting good quality graphics made for your site is a pain, AND it will cost you both time and money (if you outsource it). But I have a special free download for you today. A virtual treasure chest of over 21K profit pulling graphics you can start sing today to generate more traffic & sales!

    Nr 21. 20 professional full HD background videos. These background videos are perfect for giving your videos that extra kick they need to stand out from the crowd Oh yeah they are in full 1080p HD too, I hope you'll enjoy them.

    Nr 22. If you've ever failed to create a WordPress site of your own or typically waste hours & even weeks trying to figure it all out on your own....

    Nr 23. No doubt, you've seen all of the video launches lately! There is a reason for it... Video marketing is a GREAT way to make money, and with the recent creation tools making it super accessable for anyone to get started... It's no surprise that more people are making videos. However... there is a missing element to most video marketing products...

    Nr 24. For the first time ever... You can get the straight scoop on how someone is selling over $1,000,000/year of t-shirts on Facebook!

    Use them  .... and have fun !