In the Phillips curve framework, the long run focuses on what happens after expectations and wages fully adjust. This determines whether policymakers can permanently trade higher inflation for lower unemployment.

The Long-Run Phillips Curve (LRPC)

What the LRPC shows

The long-run Phillips curve (LRPC) is vertical because, over time, the economy’s unemployment rate returns to a level determined by labour-market fundamentals rather than by the inflation rate.

A vertical LRPC means:

• There is no long-run inflation–unemployment trade-off.

• Different inflation rates are compatible with the same long-run unemployment rate.

• Attempts to hold unemployment away from its long-run level change inflation outcomes, not long-run unemployment.

Why it is vertical

In the long run, nominal wages and prices adjust to match workers’ and firms’ expectations. If inflation turns out higher (or lower) than expected, wage bargains and price-setting eventually incorporate that reality. As these expectations adjust, unemployment is pushed back to its long-run level.

Natural Rate of Unemployment and Long-Run Equilibrium

Natural rate of unemployment

The LRPC is vertical at the natural rate of unemployment, which corresponds to the economy’s “normal” unemployment given frictional and structural conditions (not cyclical weakness).

Key implications for AP Macroeconomics:

• The natural rate is sometimes described as the full-employment unemployment rate.

• It is not “zero unemployment” because job search and skills mismatch still exist.

• It anchors the LRPC’s location on the unemployment axis.

Long-run equilibrium on the Phillips curve graph

Diagram of the Phillips curve model with inflation on the vertical axis and unemployment on the horizontal axis. The long-run Phillips curve (LRPC) is vertical at the natural rate of unemployment, and the short-run Phillips curve (SRPC) slopes downward. The intersection point represents long-run equilibrium, where inflation is fully anticipated and unemployment equals $u_n$. Source

Long-run equilibrium occurs at the point where the short-run Phillips curve (SRPC) intersects the LRPC. At that intersection, actual inflation equals expected inflation, and there is no sustained pressure for unemployment to move away from the natural rate.

The intersection matters because it marks the economy’s “resting point” after adjustments:

• If unemployment is not at the natural rate, wage and price adjustments tend to move the economy back toward it.

• The SRPC can be viewed as a temporary relationship when expectations are fixed; over time, expectation updates eliminate the temporary trade-off.

A compact way to state the LRPC

In the long run, unemployment is pinned at the natural rate.

This equation is not a forecasting tool by itself; it summarises the LRPC’s core claim about the long-run outcome.

Interpreting the LRPC for policy and outcomes

What policymakers can and cannot do in the long run

Because the LRPC is vertical:

• Policymakers cannot permanently reduce unemployment below the natural rate by accepting higher inflation.

• Policies that push unemployment away from the natural rate create short-run movements, but long-run adjustment returns unemployment to $u_n$.

The role of expectations in reaching the intersection

Long-run equilibrium at the SRPC–LRPC intersection highlights a key idea: when inflation outcomes differ from what people anticipated, expectations adjust, changing wage-setting and price-setting behaviour. Over time, that adjustment is what prevents a stable, long-run downward-sloping relationship between inflation and unemployment.

Reading the graph correctly

Scatter plot of inflation (y-axis) against unemployment (x-axis) illustrating the classic short-run negative relationship associated with the Phillips curve. This kind of empirical plot helps distinguish the observed short-run pattern from the long-run claim that unemployment returns to the natural rate once expectations adjust. Use it to connect the theoretical SRPC idea to real-world data behavior. Source

On a standard Phillips curve diagram:

• The LRPC is a vertical line at $u_n$.

• The SRPC intersects it at the long-run equilibrium point.

• The inflation rate at that point can be high or low; what matters is that it is consistent with expectations and unemployment equals the natural rate.