The Phillips Curve was an expression of the relationship
between inflation and unemployment, popular in the 1950s and
60s. It said that high inflation was accompanied by low unemployment
statistics in the economy.
But after 1970, the theory was challenged, because of the
variety of other relevant indicators. Most of that had to
do with the theory of aggregate supply and aggregate demand.
It remains true that when output is high, the largest percentage
of the workforce will be employed, and unemployment rates
will be lowest. But low unemployment rates alone are not a
corollary to high inflation.
What matters most to us is the fact that during periods of
high inflation, the savings rate goes down. I have my own
hypothesis: the savings rate is a direct corollary to standard
of living in retirement.
What is worse is that what little savings have been accumulated
in the past are now subject to a rate of return that is likely
low. Or else, less than the rate of inflation. That diminishes
the purchasing power of the saved dollar, at a time when savings
cannot normally be increased because of higher prices!
But even worse than that is the thought that the high level
of employment may be temporary. The most recent statistics
in The Review of the Economy, a government publication, reveals
that some 96,300 people are employed in the construction industry.
Compare that with 19,500 workers in the petroleum sector.
I compare these statistics, primarily because workers in oil
and gas have relatively good compensation packages. Workers
in construction are contract workers typically and have little
or no entitlements to sick leave, maternity leave, health
plans and pension plans, apart from National Insurance benefits.
If these 96,000 odd jobs are maintained in the construction
sector without a comprehensive compensation package, the workers
will retire without pensions in keeping with their average
wages over their years of work.
This is a serious threat to standard of living. The way out
of the tunnel for them is a moratorium on consumption. Spending
on the niceties will have to be curtailed. Neither the brand
name clothing nor the plasma TV experience are likely to outlast
the fall from haves to have-nots.
It is better to bite the bullet now when you are young, strong
and can sacrifice, than later, when you are old and weak,
and there is no room for personal sacrifice.
One good thing about low unemployment is that it opens a window
of opportunity for workers to hold two jobs, or else to work
longer hours in the same job. It may be the best solution
The concept of working longer hours in the same job is one
of the factors that led to the discounting of the Phillips
This is because when output increases, employers first respond
by using the existing workers to produce more. This leads
to overtime pay.
It helps when the tax rate is fixed at 25 per cent, because
overtime pay does not lead to taxation in a higher tax bracket,
as used to be the case three years ago. This is why in times
like these: longer hours can be beneficial from a total pay
In addition some firms have excess labour, and low unemployment
allows the firm to maximise efficiency.
Of course economic theory is good, but is human behaviour
the overriding factor?
You see, economists relied on Phillip, but the behavioural
theorists have Peter. It is called the Peter Principle. It
states that in the employment hierarchy, everyone rises to
his highest level of incompetence.