Definition
Okun's Law
Okun's law is the empirical relationship that each percentage-point rise in unemployment above its natural rate is associated with a roughly 2% fall in real GDP below potential.
Okun's law links the labour market to output: when the economy slows and the output gap turns negative, unemployment rises in a fairly predictable proportion. It connects the output gap to joblessness.
The exact ratio varies by country and era, and is harder to apply in India given its large informal sector and underemployment, where joblessness is measured differently. Still, the principle, that growth below potential raises unemployment, guides macro forecasting.
Related terms
- GDP (Gross Domestic Product)GDP is the total value of all goods and services produced within a country over a period, the broadest single measure of how big and how fast an economy is growing.
- Phillips CurveThe Phillips curve describes an inverse short-run relationship between unemployment and inflation: lower unemployment tends to come with higher inflation, and vice versa.
- NAIRUNAIRU is the non-accelerating inflation rate of unemployment, the jobless rate at which inflation stays stable; below it, inflation tends to rise.
- Output GapThe output gap is the difference between an economy's actual output and its potential (full-capacity) output, signalling whether it is overheating or underperforming.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.