Okun's Law

Okun's Law is an empirically observed relationship represented by the formula above, where ΔY is the change in real GDP (expressing the gap in the economy's production relative to potential output), ΔU is the change in the unemployment rate, Yp is the potential output of the economy, and Y is the actual output of the economy. The coefficient 0.5 is commonly used, implying that for every 1% increase in the unemployment rate, a country's GDP will be an additional approximately 0.5% lower than its potential GDP. The result given by the formula represents the percentage point difference between actual and potential GDP.

Okun's Law is useful for policymakers and economists as it provides a simple estimate of the potential impact of changes in unemployment on output. It can inform decisions on fiscal and monetary policy, signaling when there is a need to stimulate economic growth to reduce the output gap caused by unemployment.