Okun's Law Calculator
Calculate the relationship between unemployment and GDP gap using Okun's Law
Calculate Using Okun's Law
Labor Market Data (to calculate Output Gap)
Current actual unemployment rate
Long-run equilibrium unemployment rate
Default: -0.45 for US. Typically ranges from -0.15 to -0.85
Okun's Law Results
Okun's Law Formula: (U - U*) = β × (Y - Y*) or Ỹ = (U - U*) / β
Interpretation: Output and unemployment are close to their natural levels
Coefficient Used: -0.45 (negative values indicate inverse relationship)
Economic Cycle Analysis
Example: US Economic Analysis
Scenario: Post-Recession Recovery
Unemployment Rate: 8.5%
Natural Unemployment Rate: 5.5%
Okun Coefficient: -0.45 (US historical average)
Output Gap Calculation
Output Gap = (U - U*) / β
Output Gap = (8.5% - 5.5%) / (-0.45)
Output Gap = 3.0% / (-0.45)
Output Gap = -6.67%
This indicates GDP is 6.67% below its potential, suggesting significant economic slack.
Okun Coefficients by Country
Higher absolute values indicate greater sensitivity of unemployment to output changes
Key Economic Relationships
Negative relationship between unemployment and GDP gap
Higher unemployment indicates lower economic output
Coefficient varies by country's labor market flexibility
Useful for economic forecasting and policy analysis
Incorporates labor hoarding and workforce participation effects
Understanding Okun's Law
What is Okun's Law?
Okun's Law describes the empirical relationship between unemployment and economic output (GDP). Discovered by economist Arthur Okun in the 1960s, it shows that for every 1% increase in unemployment above its natural rate, GDP falls by approximately 2-3% below its potential level.
Why is it Important?
- •Economic forecasting and policy planning
- •Assessing the cost of unemployment in economic terms
- •Understanding business cycle dynamics
- •Guiding monetary and fiscal policy decisions
Mathematical Formulation
(U - U*) = β × (Y - Y*)
- U: Actual unemployment rate
- U*: Natural unemployment rate
- Y: Actual GDP growth
- Y*: Potential GDP growth
- β: Okun coefficient (typically negative)
Alternative Form
Output Gap = (U - U*) / β
This form directly calculates how much GDP deviates from its potential based on unemployment gaps.