Okun's law

In economics, Okun's law is an empirically observed relationship between unemployment and losses in a country's production.

[4] Okun's law states that a one-point increase in the cyclical unemployment rate is associated with two percentage points of negative growth in real GDP.

The relationship has been tested by regressing GDP or GNP growth on change in the unemployment rate.

Martin Prachowny estimated about a 3% decrease in output for every 1% increase in the unemployment rate.

According to Andrew Abel and Ben Bernanke, estimates based on data from more recent years give about a 2% decrease in output for every 1% increase in unemployment.

The gap version of Okun's law may be written (Abel & Bernanke 2005) as: In the United States since 1955 or so, the value of c has typically been around 2 or 3, as explained above.

A more commonly used form of Okun's law, known as the difference or growth rate form of Okun's law, relates changes in output to changes in unemployment: At the present time in the United States, k is about 3% and c is about 2, so the equation may be written The graph at the top of this article illustrates the growth rate form of Okun's law, measured quarterly rather than annually.

So we finally obtain Through comparisons between actual data and theoretical forecasting, Okun's law proves to be an invaluable[clarification needed] tool in predicting trends between unemployment and real GDP.

Many, including the Reserve Bank of Australia, conclude that information proved by Okun's law to be acceptable to a certain degree.

have concluded this to be true due to unforeseen market conditions that may affect Okun's coefficient.

All recessions showed two common main trends: a counterclockwise loop[clarification needed] for both real-time and revised data.