- Okun’s Law is an empirical rule that relates unemployment to economic output (GDP).
- It was proposed by economist Arthur Okun in the early 1960s.
- In simple terms, Okun’s Law suggests that there is an inverse relationship between the unemployment rate and the GDP of a country.
Okun’s Law states:
“For every 1% increase in the unemployment rate, a country’s GDP will typically be an estimated 2% lower than its potential GDP.”
What Does Okun’s Law Imply?
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High Unemployment → Low Output: When more people are unemployed, the economy is not producing as much as it could be. Resources (workers) are underutilized.
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Low Unemployment → High Output: When unemployment decreases, more people are working, which contributes to higher production and economic output.