Phillips Effect

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The Phillips Effect in economics is a hypothesized relationship between accelerating inflation and payroll employment.

The hypothesis states that inflation shocks cause a short term change in the behavior of firms and laborers: laborers accept jobs at lower pay if unemployed and firms are more willing to hire to take advantage of the possibility of pricing power, because of the lag between their ability to raise prices and their costs rising. This effect dissipates as the inflation rate becomes expected, with workers demanding higher wages and firms being less willing to hire.

Also see: Phillips Curve