THE RELATIONSHIP BETWEEN PRICES (INFLATION) AND UNEMPLOYMENT; PHILIPS CURVE - A STUDY BASED ON THE SRI LANKAN ECONOMY

Abstract

Ever since the late 1950s, economists, policy makers and politicians, esp., in the developed world have speculated and argued about the evidence of the trade-off between inflation and unemployment; Philip’s curve (1958). The implication is that, one can have less unemployment for more inflation or less inflation for more unemployment, reminding us that economics is a study of choices and that every choice has an associated cost. Hence, the objective of this study is to witness whether or not this is so called ‘trade-off’ between inflation and unemployment is apparent in the Sri Lankan economic context and based on that to present the causal factors behind the particular type of behavior identified. The significance of this study is that, if the inverse relationship between prices and unemployment were true, economic policy making would be faced with a cruel dilemma; ‘If they were to press full employment, would it be that the expense of undue price increases and vice-versa?’. This paper is based on the study of a particular identifiable ‘relationship’ between two variables identified; prices and unemployment, thus, Spearmen’s correlation coefficient and regression analysis are used for the analysis and since the Sri Lankan economy has been subject to two totally incompatible policy regimes; inward looking (1970 to 1976) and outward looking (1977 to up to date); the study concentrates on each policy regime separately. Finally, having summarized the findings of the paper, it is highly controversial to see that there exists no such significant relationship between figures of unemployment and inflation in Sri Lanka, that Philips had tried to bring into reality in the late 1950s based on empirical evidence in the United Kingdom.

Keywords: Inflation, Unemployment, Philips’s Curve

For full Paper: fmscresearch@sjp.ac.lk