Atlas Macro

Economy

Okun's Law

A rule of thumb linking growth and jobs: for each percentage point that GDP growth falls short of its trend rate, unemployment tends to rise by about half a percentage point.

Key points

  • Rough rule of thumb for growth-to-unemployment transmission.
  • Assumes productivity constant; breaks down in supply shocks.
  • Helps forecast jobless rate from growth forecasts.

Example

If GDP growth expected to slow from 2.5% to 0.5% (2 percentage point drop), Okun's Law predicts unemployment rises ~1 percentage point.

In history

In spring 2020 the relationship broke down: unemployment jumped by 11 points in two months, far more than the fall in output alone implied, because lockdowns hit labour-intensive services first.

Related terms