Okun’s law

In most disciplines the word law is reserved for really important relationships or findings. In economics, there is something called Okun’s Law. NC State University economist Mike Walden explains what it means.

“Okun’s Law was named after a very prominent economist, Arthur Okun, who practiced in the ’50s, ’60s and ’70s. He advised presidents. He was on the President’s Council of Economic Advisers. And Okun’s Law, which he obviously founded, describes a relationship between economic growth and unemployment. Simply put, for every percentage point that the economy grows under – under – its potential, unemployment rises by a half percentage point.

“So let me give you an example. In the great recession, the economy at one point was growing 10 percent under its potential. Using Okun’s Law, that would mean that the jobless rate at its peak would have been 5 percentage points higher than it would have been before the recession. And indeed that’s pretty much on mark. The unemployment rate going into the recession was about 5 percent, and at the peak of the recession it was about 10 percent.

“So Okun’s law even though it was developed some 50 years ago really holds to this day, and I think importantly what it focuses on is the importance of economic growth and lack of economic growth as a factor behind high unemployment rates.”