Okun’s Law

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Okun’s Law

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. 

Read More: Making sale of raw milk illegal is voodoo economics 

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 City92(4), 73.

Lee, J. (2000). The robustness of Okun’s law: Evidence from OECD countries. Journal of macroeconomics22(2), 331-356.

 

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Editor-in-Chief

Geoffrey Kerosi is a prolific Kenyan writer based in Nairobi City. He holds a Bachelors in Economics and Statistics and is currently pursuing Masters in Public Policy and Administration (MPPA) from Kenyatta University. Email: info@kerosi.com. Whatsapp: +254713 639 776 YouTube: Kerosi TV

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