What is Okun’s law?

This concept was coined by the American economist Arthur Okun, gaining great relevance among the economic and financial spheres of a country. Okun's law tries to define the empirical relationship between the variables of the unemployment rate and the production of a country (measured in the Start real that this one has). The linear relationship proposed between both variables and the percentage variations that occur indicate that it should occur in negative terms.

When in an economy there is a growth situation (or it is expanding) and it has a percentage of active population stable, the number of people working must be increased in order to increase production and lower unemployment figures. In situations of recession, the number of workers will decrease compared to a growth situation.

On the other hand, when we speak of the potential growth rate we refer to the moment in which all the productive factors They are at their maximum, since they are all being used so that the economy can increase as much as possible and that it can absorb.

How to calculate Okun's law?

The most widespread formula to calculate Okun's law is the one that takes into account the country's growth rate in relation to its production and unemployment. In this way, the formula looks like this:

ΔY / Y = k - cΔu


Y: real GDP or production level

ΔY: Variation of production level

k: Annual percent growth in full employment output

c: Constant that relates the unemployment variables with the production variables

Δu: Variation produced in the unemployment rate

Obviously, and as has been shown with other laws or economic theories, it has been shown that the relationship produced by Okun's law is not entirely stable or exact, but approximate or in any case indicative.

Leave a Comment