FIGURE 2 THE PHILLIPS CURVE
A rise in wages may cause a rise in prices, but if worker productivity increases sufficiently to offset the wage increase, product prices can remain stable. When the rates of change in productivity and wages are equal, inflation is zero (point a). This is the natural rate of unemployment. If policymakers want to use expansionary policy to reduce unemployment from un to u1, they must be willing to accept inflation of p1. Reducing unemployment further to u2 would raise inflation to p2 as labor markets tighten and wages rise more rapidly than productivity.