There is an inverse relationship between Gross Domestic Product (GDP) growth and unemployment.
To be specific according to Professor Okun’s original research, “a 3% increase in real GDP leads to a 1% point decrease in unemployment rate.”
The law was later updated to read, “a 2% output growth leads to a 1% decrease in unemployment rate.”
The law was named in honor of Arthur Okun who conducted a lot of empirical research around unemployment and GDP growth in the 1960’s.
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Lee (2000) argues that Okun’s law has largely been proven true statistically for most countries. This means that the law has been proven through use of statistics.
When does Okun’s Law change?
- Breaks in historical magnitude
- changes in productivity which are hard to predict
Importance of Okun’s Law
Economists all over the world generally agree that Okun’s law is very important in predicting the relationship between real GDP and unemployment. Okun’s law has over time been proven to be more accurate in the short-run than long-run conditions.
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References
Knotek II, E. S. (2007). How useful is Okun’s law?. Economic Review-Federal Reserve Bank of Kansas City, 92(4), 73.
Lee, J. (2000). The robustness of Okun’s law: Evidence from OECD countries. Journal of macroeconomics, 22(2), 331-356.
