Graph walkthrough · Macro · Phillips curve

Better job matching lowers the natural rate

Online job boards cut the time it takes the unemployed to find work.

Unemployment rateInflation rate0SRPCLRPCA₀

Step 1 of 3 · Before the job boards

The horizontal axis is the unemployment rate. The vertical axis is the inflation rate. The long-run Phillips curve is vertical at the natural rate, the unemployment that remains when the economy is at potential. The economy sits at A₀.

The chain in words

  1. Step 1

    Before the job boards

    The horizontal axis is the unemployment rate. The vertical axis is the inflation rate. The long-run Phillips curve is vertical at the natural rate, the unemployment that remains when the economy is at potential. The economy sits at A₀.

  2. Step 2

    Both curves shift left

    Faster matching means fewer people are between jobs at any time. Frictional unemployment falls, so the natural rate falls and the long-run Phillips curve shifts left. The short-run Phillips curve shifts left with it, since it always passes through the natural rate at the expected inflation rate.

  3. Step 3

    Lower unemployment, same inflation

    The economy settles at A₁: lower unemployment with the same inflation. This is not a boom along the curve, it is a better labor market. Only changes in the natural rate move the LRPC.

Takeaway. A fall in the natural rate of unemployment shifts both the long-run and the short-run Phillips curves left.

Draw it yourself

This shock: draw the graphA demand boom hitsExpected inflation risesAn oil shock hits

More on the phillips curve graph

A demand boom along the Phillips curveExpectations catch upAn oil shock on the Phillips curveA credible disinflation

Go deeper

Lesson: Types of Unemployment

The walkthrough shows the chain. The lesson explains why each link holds, with worked examples and practice questions that remember what you get wrong.
Read the lessonStart the course