Short answers, pulled from the story.
Okun's law states that for every one-percentage-point rise in the unemployment rate, a country's real output falls roughly two percentage points below its potential GDP. Arthur Melvin Okun proposed this relationship in 1962. The relationship varies depending on the country and time period, and its stability and usefulness have been disputed.
Okun's law is named after Arthur Melvin Okun, who first proposed the relationship in 1962. In Okun's original formulation, a 2% rise in output corresponded to a 1% decline in cyclical unemployment, a 0.5% rise in labor force participation, a 0.5% rise in hours worked per employee, and a 1% rise in labor productivity.
The gap version of Okun's law compares actual GDP to potential GDP, linking any shortfall to the gap between actual and natural unemployment. The difference version tracks quarterly changes in real GDP against quarterly changes in the unemployment rate, using only directly observable data. Forecasters favor the difference version because neither potential GDP nor the natural unemployment rate can be directly measured.
Okun's law is more reliable for short-run trend predictions than for long-run forecasting or precise numerical calculations. The San Francisco Federal Reserve Bank, examining data from recessions in the 1970s, 1990s, and 2000s, found a consistent counterclockwise loop pattern in the unemployment-output relationship. The Reserve Bank of Australia similarly concluded the law is acceptable within certain limits.
Martin Prachowny estimated approximately a 3% decrease in output for every 1% rise in the unemployment rate, larger than Okun's original figure. He argued that most of this larger effect reflects changes in factors other than unemployment, such as capacity utilization and hours worked. When those factors are held constant, the direct unemployment-GDP association falls to about 0.7% per percentage point of unemployment change.
In the United States since roughly 1955, the Okun coefficient has typically run between 2 and 3. At present, the growth rate form of the law uses a coefficient of about 2, alongside an average annual full-employment output growth rate of about 3%. Andrew Abel and Ben Bernanke estimated approximately a 2% output decrease for every 1% unemployment increase, based on more recent data.