Okun’s Law
AdvancedOkun’s law is an observed relationship between unemployment and economic output, suggesting that when unemployment rises above its normal level, output falls below its potential by a larger percentage.
The relationship was identified by economist Arthur Okun in 1962. A common version suggests that each percentage point of unemployment above its natural rate is associated with output roughly two percentage points below its potential.
For example, if unemployment rises from 4% to 6%, Okun’s law would suggest output is about 4% below what the economy could produce at full employment.
Another version relates changes in unemployment to GDP growth: when growth is below its long-term trend, unemployment tends to rise, and when it is above trend, unemployment tends to fall.
Okun’s law is a rule of thumb rather than a precise law. The relationship varies between countries and over time, depending on factors such as labour laws, productivity and how firms adjust working hours instead of jobs. It is still widely used by economists and central banks to connect labour market data with estimates of economic slack.
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