Okun's law
Okun's law describes the empirical relationship between a fall in unemployment and a rise in national output.
Growth and jobs move together, and Okun's law puts a rough number on the link.
Okun's law is an empirical relationship between an economy's output and its unemployment: when output grows faster than its long-run trend, unemployment tends to fall, and when growth disappoints, unemployment tends to rise. It is a rule of thumb, named after Arthur Okun, rather than a precise law.
A rough rule with a number
In its common form, Okun's law says that to reduce unemployment, an economy must grow faster than its potential rate, and it attaches an approximate figure to how much extra growth is needed to bring unemployment down by a given amount. The exact ratio varies across economies and over time, which is why it is best treated as a useful approximation rather than a constant. It links the production side of the economy, output, to the labour side, jobs.
Why output and jobs are linked, loosely
The connection makes intuitive sense: producing more generally requires employing more people, so faster growth pulls workers into jobs, while a slump throws them out. But the link is loose because firms can adjust output without proportionally adjusting employment, by changing hours, productivity, or how intensively they use existing staff. This is why the relationship holds on average but wobbles in any particular episode, and why jobless recoveries, where output rises but hiring lags, can occur.
What it is good for
Okun's law is valuable as a quick sense-check and forecasting aid: it lets analysts translate a growth forecast into a rough expectation for unemployment, and the reverse. It also underpins the idea of an output gap, since the unemployment above its natural rate corresponds to output below potential. Used carefully, as an approximate guide rather than a precise prediction, it connects two of the most watched indicators in macroeconomics.
Okun's law is a reminder that the headline numbers of an economy are connected, and that growth is not an abstraction but something felt in jobs. Its looseness is part of its honesty: a regularity reliable enough to be useful and variable enough to warn against false precision.