Discuss the view that falling unemployment will inevitably lead to trade-offs with other macroeconomic policy objectives

Phillips explains that there is a trade off between inflation and unemployment. When there are high levels of demand in the economy, firms hire workers to be able to meet this demand, leading to low levels of unemployment. However, high levels of demand lead to demand-pull inflation, especially because when more workers are employed there are higher levels of consumption. Therefore, Phillips would argue that an economy can have either low inflation and high unemployment, high inflation and low unemployment, or moderate inflation and moderate levels of unemployment. He graphs this using the Phillips curve. For example, I1 and UE1 shows where inflation is high and unemployment is low, and I2 and UE2 show where inflation is low and unemployment is high. This would suggest that there is a trade off between falling unemployment and other macroeconomic objectives. However, there has been limited evidence for this theory using real world data. For example, the 'NICE' decade presented low levels of unemployment and inflation. However, this period did finish with the credit crunch and financial crisis, highlighting that the 'NICE' decade may have been an economically unsustainable.

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Answered by Sophie K. Economics tutor

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