The annual data in Figure 4 tell a similar, though more confused, story. In the early years, there is wide variation in the relation between prices and unemployment, varying from essentially no relation, as in Italy, to a fairly clear-cut year-to-year negative relation, as in the U.K. and the U.S. In recent years, however, France, the U.S., the U.K., Germany and Japan all show a clearly marked rise in both inflation and unemployment though for Japan, the rise in unemployment is much smaller relative to the rise in inflation than in the other countries, reflecting the different meaning of unemployment in the different institutional environment of Japan. Only Sweden and Italy fail to conform to the general pattern. Of course, these data are at most suggestive. We do not really have seven independent bodies of data. Common international influences affect all countries so that multiplying the number of countries does not multiply propor3.0 2.0 2.2 2.9 M. Friedman

Rate of Inflation Figure 4. Inflation and unemployment in seven countries, annually, 1956 to 1975 tionately the amount of evidence. In particular, the oil crisis hit all seven countries at the same time. Whatever effect the crisis had on the rate of inflation, it directly disrupted the productive process and tended to increase unemployment. Any such increases can hardly be attributed to the acceleration of inflation that accompanied them; at most the two could be regarded as at least partly the common result of a third influence [Gordon (7)].

Both the quinquennial and annual data show that the oil crisis cannot wholly explain the phenomenon described so graphically by Mr. Callaghan Already before the quadrupling of oil prices in 1973, most countries show a clearly marked association of rising inflation and rising unemployment. But this too may reflect independent forces rather than the influence of inflation on unemployment. For example, the same forces that have been raising the natural rate of unemployment in the U.S. may have been operating in other countries and may account for their rising trend of unemployment, independently of the consequences of inflation. Despite these qualifications, the data strongly suggest that, at least in some countries, of which Britain, Canada, and Italy may be the best examples, rising inflation and rising unemployment have been mutually reinforcing, 277 278

Economic Sciences 1976 rather than the separate effects of separate causes. The data are not inconsistent with the stronger statement that, in all industrialized countries, higher rates of inflation have some effects that, at least for a time, make for higher unemployment. The rest of this paper is devoted to a preliminary exploration of what some of these effects may be.