Macroeconomics, 2nd Edition by Pearson

THE LABOUR MARKET

223

The Phillips curve, with a negative empirical relationship between infla-

tion and the unemployment rate, started breaking down from the middle of the

1960s. Empirical estimates became unstable and their degree of explanatory

power began declining. This was attributed to the fact that over the course of

the 1960s, inflation rates increased worldwide. Friedman and Phelps

19

argued

that once inflation rates increase, inflation expectations begin to play a major

role in wage negotiations, separate from the role played by an excess supply of

labour or unemployment. Thus, what matters for workers in wage negotiations ...