ABSTRACT
The connection between unemployment and gross domestic product growth is often formally summarized by the statistical relationship known as “Okun’s law.” As developed by the late economist Arthur M. Okun in 1962, the “law” related decreases in the unemployment rate to increases in output growth. Although Okun’s law expresses a relationship between changes in the unemployment rate and output growth, it is more appropriate to think of it as a “rule of thumb,” as it was intended, rather than as an immutable law derived from theory. The reason that the association between the unemployment rate and output is relatively strong is that changes in the unemployment rate are related to changes in the other factors that affect output growth. Productivity changes are only slightly correlated with changes in the unemployment rate, and the variability of these changes is large—roughly two-thirds of the variability of output.
