M. Friedman
275
economy followed by higher levels of unemployment as the next step. That is
the history of the past 20 years” (speech to Labour Party Conference, 28
September 1976).
The same view is expressed in a Canadian government white paper:
“Continuing inflation, particularly in North America, has been accompanied
by an increase in measured unemployment rates” (“The Way Ahead: A
Framework for Discussion,” Government of Canada Working Paper, October
1976).
These are remarkable statements, running as they do directly counter to
the policies adopted by almost every Western government throughout the
postwar period.
a. Some evidence
More systematic evidence for the past two decades is given in Table 1 and
Figures 3 and 4, which show the rates of inflation and unemployment in seven
industrialized countries over the past two decades. According to the five-
year averages in Table 1, the rate of inflation and the level of unemployment
moved in opposite directions-the expected simple Phillips curve outcome - in
five out of seven countries between the first two quinquennia (1956-60,
1961-65); in only four out of seven countries between the second and third
quinquennia (1961-65 and 1966-70); and in only one out of seven countries
between the final two quinquennia (1966-70 and 1970-75). And even the
one exception - Italy - is not a real exception. True, unemployment averaged
a shade lower from 1971 to 1975 than in the prior five years, despite a more
than tripling of the rate of inflation. However, since 1973, both inflation and
unemployment have risen sharply.
The averages for all seven countries plotted in Figure 3 bring out even more
Figure 3. R a t e s
of Unemployment and Inflation, 1956 to 1975, by Quinquennia; Un-
weighted Average for Seven Countries
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Economic Sciences 1976
clearly the shift from a negatively sloped simple Phillips curve to a positively
sloped one. The two curves move in opposite directions between the first
two quinquennia; in the same direction thereafter.
Table 1. Inflation and unemployment in seven countries, 1956 to 1975: Average values
for successive quinquennia
DP = Rate of price change, percent per year
U = Unemployement, percentage of labor force
1956
through
1960
5.6 1.1
1.8 2.9
1.9 6.7
1.9 1.4 3.7 1.9
2.6 1.5 2.0 5.2 2.8 3.0
1961
through
1965
3.7 1.2 2.8 0.7
4.9 3.1
6.2 0.9 3.6 1.2
3.5 1.6 1.3 5.5 3.7 2.0
1966
through
1970
4.4 1.7 2.4 1.2
3.0 3.5
5.4 1.1 4.6 1.6
4.6 2.1 4.2 3.9 4.1 2.2
1971
through
1975
8.8 2.5 6.1 2.1
11.3 3.3 11.4 1.4 7.9 1.8 13.0 3.2 6.7 6.1 9.3 2.9
Note: DP is rate of change of consumer prices compounded annually from calendar year
1955 to 1960; 1960 to 1965; 1965 to 1970; 1970 to 1975. U is average unemployment during
five indicated calendar years. As a result, DP is dated one-half year prior to associated U.
The annual data in Figure 4 tell a similar, though more confused, story.
In the early years, there is wide variation in the relation between prices and
unemployment, varying from essentially no relation, as in Italy, to a fairly
clear-cut year-to-year negative relation, as in the U.K. and the U.S. In recent
years, however, France, the U.S., the U.K., Germany and Japan all show a
clearly marked rise in both inflation and unemployment - though for Japan,
the rise in unemployment is much smaller relative to the rise in inflation than
in the other countries, reflecting the different meaning of unemployment in
the different institutional environment of Japan. Only Sweden and Italy fail
to conform to the general pattern.
Of course, these data are at most suggestive. We do not really have seven
independent bodies of data. Common international influences affect all coun-
tries so that multiplying the number of countries does not multiply propor-
M. Friedman
277
Rate of
Inflation
Figure
4. Inflation and unemployment in seven countries, annually, 1956 to 1975
tionately the amount of evidence. In particular, the oil crisis hit all seven
countries at the same time. Whatever effect the crisis had on the rate of in-
flation, it directly disrupted the productive process and tended to increase
unemployment. Any such increases can hardly be attributed to the accelera-
tion of inflation that accompanied them; at most the two could be regarded
as at least partly the common result of a third influence [Gordon (7)].
Both the quinquennial and annual data show that the oil crisis cannot
wholly explain the phenomenon described so graphically by Mr. Callaghan
Already before the quadrupling of oil prices in 1973, most countries show a
clearly marked association of rising inflation and rising unemployment. But
this too may reflect independent forces rather than the influence of inflation
on unemployment. For example, the same forces that have been raising the
natural rate of unemployment in the U.S. may have been operating in other
countries and may account for their rising trend of unemployment, independ-
ently of the consequences of inflation.
Despite these qualifications, the data strongly suggest that, at least in some
countries, of which Britain, Canada, and Italy may be the best examples,
rising inflation and rising unemployment have been mutually reinforcing,
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