labor force minus the unemployed, so there is a negative relationship between output and unemployment (conditional on the labor force)." according to [the] currently accepted versions of Okun's law, to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real GDP must grow approximately 2 percentage points faster than the rate of growth of potential GDP over that period. So, for illustration, if the potential rate of GDP growth is 2%, Okun's law says that GDP must grow at about a 4% rate for one year to achieve a 1 percentage point reduction in the rate of unemployment." It is most important to note that Okun's law is a statistical relationship that relies on a regression of unemployment and economic growth. As such, running the regression can result in differing coefficients that are used to solve for the change in unemployment, based on how the economy grew. It all depends on the time periods used and inputs, which are historical GDP and employment data. The law has indeed "evolved," or changed over time to fit the current economic climate and employment trends at the time. One version of Okun's law has stated very simply that when unemployment falls by 1%, GNP rises by 3%. Another version of Okun's Law focuses on a relationship between unemployment and GDP, whereby a percentage increase in unemployment causes a 2% fall in GDP. As with any law in economics, science or any discipline, it is important to determine if it holds under varying conditions and over time. In regard to Okun's law, there appear to be conditions where it holds quite well and others where it doesn't. For instance, a review of Okun's law by the Federal Reserve of Kansas City detailed that one of Okun's first relationships looked at quarterly changes in unemployment compared to quarterly growth in real output and it seemed to hold up well. Despite the fact that there are in reality many moving parts to the relationship between unemployment and economic growth, there does appear to be empirical support for the law. The Kansas City Fed study concluded that "Okun's law is not a tight relationship," but that "Okun's law predicts that growth slowdowns typically coincide with rising unemployment." In regard to the fact it did not hold up that well during the financial crisis.
Overall, there is little debate that Okun's law represents one of the most straightforward and convenient methods to investigate the relationship between economic growth and employment. One of the key benefits of Okun's law is its simplicity, a benefit shared by portfolio management, and the ability to simply state that a 1% decrease in unemployment will occur when the economy grows about 2% faster than expected. Additionally, his law has been studied extensively since it was first published. Finally, there has been plenty of history over the past five decades, since Okun's first works were published, to put it to the test. In reality though, it appears that relying on
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