Okun’s Law describes the statistical relationship between:

• Unemployment rate changes
• Economic growth (GDP)

Concept: For every 1% increase in unemployment above its natural rate, GDP falls by approximately 2-3% below its potential.

Named for Arthur Okun (1962), important for macroeconomic analysis

The traditional form of Okun’s Law is:

\[\Delta Y/Y = k - c \cdot \Delta u\]

Where: \(\Delta Y/Y\) = percentage change in real GDP, \(\Delta u\) = change in unemployment rate (percentage points), \(k\) = average growth rate of full-employment GDP, and \(c\) = Okun’s coefficient,

Another way to write this formula can relate output gaps to unemployment gaps:

\[\frac{Y - Y^*}{Y^*} = -c \cdot (u - u^*)\]

##       Year       Unemployment      GDP_Growth     
##  Min.   :2000   Min.   : 3.000   Min.   :-12.000  
##  1st Qu.:2006   1st Qu.: 4.275   1st Qu.:  3.275  
##  Median :2012   Median : 4.700   Median :  4.650  
##  Mean   :2012   Mean   : 5.300   Mean   :  3.163  
##  3rd Qu.:2017   3rd Qu.: 5.400   3rd Qu.:  5.450  
##  Max.   :2023   Max.   :12.600   Max.   :  8.300

## 
## Call:
## lm(formula = GDP_Growth ~ Unemployment, data = econ_data)
## 
## Residuals:
##      Min       1Q   Median       3Q      Max 
## -1.85922 -0.57902 -0.09237  0.51814  2.05523 
## 
## Coefficients:
##              Estimate Std. Error t value Pr(>|t|)    
## (Intercept)  15.25856    0.53845   28.34   <2e-16 ***
## Unemployment -2.28227    0.09495  -24.04   <2e-16 ***
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 0.9381 on 22 degrees of freedom
## Multiple R-squared:  0.9633, Adjusted R-squared:  0.9616 
## F-statistic: 577.7 on 1 and 22 DF,  p-value: < 2.2e-16

## Estimated Okun's Coefficient: 2.28

## 
## R-squared: 0.963

## 
## Adjusted R-squared: 0.962