Phillips Curve

The Phillips Curve describes the observed inverse relationship between unemployment and inflation: when unemployment falls, wages and prices tend to rise, and vice versa. Originally an empirical finding (A.W. Phillips, 1958), it became central to macroeconomic policy — the idea that policymakers face a trade-off between the two. Later work (Friedman, Phelps) showed the trade-off is short-run only; in the long run, expectations adjust and the curve shifts. For founders, the mental model is broader: many systems present apparent trade-offs that hold in the short term but break down as participants adapt. Beware optimising one variable and assuming the other stays fixed.

Recognise the short-run trade-off: pushing hard on one variable (growth, hiring, spend) often inflates another (cost, complexity, dilution). Plan for the second-order effect, not just the first. And remember the long-run lesson — participants adapt. A wage hike today becomes the new baseline tomorrow; expectations reset. Build strategy for the world after the adjustment, not just the current curve.

The Phillips Curve describes a short-run trade-off between unemployment and inflation that breaks down as expectations adjust. Use it to recognise that apparent trade-offs in your business may shift when participants adapt — plan for the world after the adjustment.