Okun's law

Okun's law is an empirical relationship linking changes in an economy’s output to changes in its unemployment rate. It describes a recurring tendency, not an exact or immutable rule.

Output gap: The difference between actual economic output and the output an economy could sustain without creating inflationary pressure. The gap form relates deviations of output from potential to deviations of unemployment from its natural rate.
Arthur Okun: An American economist who served as chairman of the Council of Economic Advisers and studied output and unemployment. Okun documented the relationship that later took his name.
Recession: A significant decline in economic activity spread across an economy and lasting more than a brief period. Recessions often reveal the output and unemployment movements captured by Okun’s law.
Labor force participation rate: The share of the working-age population that is employed or actively seeking work. Unemployment can fall because people leave the labor force, not because output creates jobs.
Structural unemployment: Unemployment caused by persistent mismatches between workers’ skills or locations and available jobs. Changes in structural unemployment can alter the baseline around which Okun’s relationship is estimated.
Potential output: The level of production an economy can sustain when its resources are used at normal rates. The benchmark helps distinguish cyclical output shortfalls from the economy’s productive capacity.
Potential GNP: Its Measurement and Significance: Arthur Okun’s 1962 paper examining potential output and its relationship to unemployment. This work presented the original empirical formulation.
Economic forecasting: The use of data and models to predict future economic conditions. Forecasters use estimated Okun coefficients to translate output projections into unemployment projections.
Employment-population ratio: The share of the working-age population that is employed. This measure can reveal employment changes that the unemployment rate alone obscures.
Natural rate of unemployment: The unemployment rate consistent with stable inflation, given labor-market structure and expectations. Estimating this unobserved benchmark affects calculations using the gap form.

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