Okun

Okun's law, the most common association with the term Okun in economics, is an empirical relationship between unemployment and economic growth. Named after American economist Arthur M. Okun, it describes how changes in the unemployment rate are linked to movements in real GDP, typically in the short to medium run.

In its growth form, Okun's law states that when unemployment changes, real GDP grows or contracts by a roughly proportional amount. A common specification is (ΔY/Y) ≈ -β ΔU, where ΔY/Y is the percent change in real output and ΔU is the change in the unemployment rate. The coefficient β is not fixed; for the United States, estimates in the postwar period typically place β around 2, with some studies ranging from about 2 to 3. An alternative formulation relates the output gap (the difference between actual and potential output) to the deviation of unemployment from its natural rate: (Y* − Y)/Y* ≈ κ (U − U*).

Okun's law is an empirical regularity rather than a physical law. Its magnitude varies by country, time period, and the definitions used for potential output and unemployment. It tends to be more reliable for analyzing short- to medium-term movements around full employment and is widely used in policymaking and macroeconomic modeling, while recognizing its limitations.