Friday, February 26, 2016

Okun's Law

In my macro classes when I talk about how the unemployment rate falls when GDP increases (because greater output usually requires more workers), I usually say something like "but we probably need at least some minimum increase in GDP to see the unemploymet rate go down." This where Okun's Law might come help out. See Mr. Okun Saw This One Coming: Jobs Report Follows His 'Law'.

This is the key passage:

""Okun's Law," as it came to be known, has been tweaked over the years, and now states that for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point.

Most economists peg the economy's long-term trend rate at about 2.5%, which is roughly where economists polled by The Wall Street Journal estimate growth stands in the current quarter.That means, according to Okun's Law, that the economy isn't growing fast enough to bring down unemployment."

See also Arthur M. Okun from the Library of Economics and Liberty.

And Is Okun’s Law Really Broken? By JUSTIN WOLFERS.

This was a post from December, 2010. Here are the growth rates in real GDP for the years 2011-2015

1.60%
2.22%
1.49%
2.43%
2.38%

Now here are the unemployment rates for the years 2010-2015

9.6%
8.9%
8.1%
7.4%
6.2%
5.3%

So unemployment has fallen quite a bit despite sluggish growth. But the employment picture might not be that great. We see a drop in the unemployment rate of 4.3 percentage points but the increase in the percentage of 25-54 year olds employed was much smaller.  Only 2.26 percentage point increase or only about half of the fall in unemployment. Here are the numbers for the percentage of 25-54 year olds employed for the years 2010-2015.

75.08%
75.13%
75.73%
75.89%
76.71%
77.24%


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