In his original research, Okun found that in the United States every percentage point drop in the unemployment rate from the preceding quarter corresponded to a roughly 3.2 percent increase in economic output. Some researchers have challenged and revised these numbers, but recent IMF research2 found that almost all deviations from Okun’s Law are modest and short-lived. Otherwise, Okun’s relationship is strong and stable, even in modern conditions.
Estimating Okun’s Law for the United States
We derived our estimates using the “changes” version of Okun’s Law.
For the curious, here’s a technical explanation of our methodology.
Equation (1): △Ut=α+β△Yt+ϖt
ΔUt is the change in seasonally adjusted unemployment rate from the previous period;
ΔYt is the percent change in real seasonally-adjusted GDP from the previous period;
ϖ is the error of approximation;
β is the so-called Okun’s coefficient, representing the change in the unemployment rate for every percent change in GDP.