Phillips Curve Is a Particular Case that Economists Misinterpret the Correlation between Two Dependent Variables for Causal Relation

Chao Chiung Ting

International Journal of Economics and Finance, 2018, vol. 10, issue 11, 70

Abstract: Since labor supply and labor demand determines both employment and wage in labor market endogenously, both wage and employment, which we observe, are dependent variable in the sense of ex-post. Since unemployment is equal to labor supply minus labor demand, unemployment is dependent variable in the sense of ex-post, too. There is no causal relation between two dependent variables because independent variable explains dependent variable. Thus, the relationship between ex-post unemployment and ex-post wage in Phillips (1958) is not causal relation but correlation as meaningless as the strong correlation between ice cream sale and drowning rate. Similarly, both price and quantity we observe are determined by supply and demand endogenously in the sense of ex-post. Thus, inflation rate is dependent variable because inflation rate is the change in price level (i.e., change in the average price of all goods in the sense of ex-post). Hence, we are not permitted to explain unemployment rate by inflation rate and vice versa. As Friedman (1977) conjectured that Phillips curve is correlation which is misinterpreted for causal relation (i.e., trade-off) by economists, I conclude that Phillips curve is meaningless correlation between two dependent variables so that economic policy based on Phillips curve is invalid.

Date: 2018
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