Overview
Okun's law is the relationship between unemployment and output set out by the American economist Arthur Okun in "Potential GNP: Its Measurement and Significance" (1962). Working on the Council of Economic Advisers under President Kennedy, Okun used it to estimate how much the economy could produce at full employment (potential GNP). It is an empirical regularity observed repeatedly in data rather than a law derived from theory.
Two versions
- Difference version: links the change in the unemployment rate to real GDP growth. When growth exceeds a certain rate (roughly potential growth), unemployment falls; when it is lower, unemployment rises.
- Gap version: links the output gap, the difference between actual and potential GDP, to the gap between actual and natural unemployment.
The ratio between the two is called the Okun coefficient. Okun estimated from US data of his time that a one-percentage-point change in unemployment corresponded to about a 3% difference in output, but later studies have reported different values across countries and periods. The relationship also helps explain why firms' hiring plans, job seekers' strategies and household income plans change with the economic outlook.
Empirical tests
Marking its 50th anniversary, Ball, Leigh and Loungani (2017) analysed data for 20 advanced economies and found that Okun's law still fits well in most of them and did not break down around the 2008 financial crisis. The coefficients, however, differed widely between countries, which they linked to differences in employment protection, labour-market institutions and how hours are adjusted.
Limitations and debate
Potential GDP and the natural rate of unemployment cannot be observed directly, so results depend on how they are estimated. When firms cut hours instead of jobs in a downturn, or when the unemployed give up searching and leave the labour force, unemployment does not move in line with output. "Jobless recoveries", in which employment lags the rebound in output, are cited as cases where the relationship weakens. Differences in labour-market structure connect with dual labour market theory.
Using it to read economic indicators and prepare for exams
Knowing Okun's law makes it easier to interpret quarterly GDP growth figures alongside monthly employment releases. Economics exams often ask you to write the relationship between the output gap and the unemployment gap and combine it with the Phillips curve to explain growth, unemployment and inflation together. For policy responses to recessions, it is useful to study it alongside the aggregate-demand management of Keynesian economics.
Sources reviewed: 2026-10-16
References
- Okun, A. M. (1962). Potential GNP: Its measurement and significance. In Proceedings of the Business and Economic Statistics Section (pp. 98–104). Washington, DC: American Statistical Association.
- Ball, L., Leigh, D., & Loungani, P. (2017). Okun's law: Fit at 50? Journal of Money, Credit and Banking, 49(7), 1413–1441.