Okunse's law

The Okun's Law (also Okun's Law ) describes the correlation between output growth and unemployment in an economy , the first time by Arthur Melvin Okun was studied (1928-1980) on the basis of economic data from the US. Okun's law is - although the name suggests it - not an economic law, but an empirically observable correlation. The main message of the law is that growth above a certain rate, called normal output growth or the employment threshold, is accompanied by a decrease in the unemployment rate. If economic growth is lower than normal output growth, the unemployment rate rises.

Together with the Phillips curve and the total demand function , Okun's law describes the interaction between the economic factors production growth, money supply growth and unemployment.

Alternative definition

An alternative approach of Okun's law states that fluctuations in the real gross domestic product (GDP) around its trend are associated with an opposite fluctuation in the unemployment rate around its equilibrium value ( natural unemployment rate ). Thus, the unemployment rate rises when economic growth slows and falls when it accelerates.

Empirical observation of Okun based on an application example

Real GDP Growth and Unemployment Rate Change in the United States, 1961–2007

During the period he studied (1954–1962), Okun observed that output growth above a certain rate was accompanied by a decrease in the unemployment rate. However, if growth was below this rate, unemployment increased. The point at which the trend reverses is called normal output growth or the employment threshold. This is the growth rate at which the unemployment rate remains constant under all other things being equal .

For the period from 1961 to 2007, for example, the relationship between production growth in the year and the change in the annual unemployment rate is as follows: ${\displaystyle g_{yt}}$ ${\displaystyle t}$ ${\displaystyle u_{t}-u_{t-1}}$

${\displaystyle u_{t}-u_{t-1}=-0{,}36(g_{yt}-3{,}29\,\%)}$

This means that only growth that exceeds the normal production growth of 3.29% leads to a reduction in the unemployment rate. Every additional percentage point of growth reduces the unemployment rate by 0.36 percentage points. Okun's law clearly predicts a decrease in the unemployment rate of 0.6 percentage points for a growth rate of 5%.

The reverse interpretation of Okun's law, that a reduction in unemployment goes hand in hand with an increase in output growth, is considered controversial.

Mathematical formulation

If the unemployment rate is the current year and the unemployment rate is the previous year, the general formulation of Okun's law is: ${\displaystyle u_{t}}$ ${\displaystyle u_{t-1}}$

${\displaystyle u_{t}-u_{t-1}=-\beta (g_{yt}-{\overline {g}}_{y})\!\,}$

The coefficient is the slope of the regression line and thus describes the relationship between production growth and the change in the unemployment rate. It thus provides information on how sensitively the unemployment rate reacts to economic growth. , the intersection of the regression line with the x-axis, represents the production growth from which unemployment falls ( employment threshold ). Every percent growth above output growth leads to a percentage point reduction in the unemployment rate . is the percentage change in real GDP from the previous year to the current year. ${\displaystyle \beta }$ ${\displaystyle {\overline {g}}_{y}}$ ${\displaystyle {\overline {g}}_{y}}$ ${\displaystyle \beta }$ ${\displaystyle g_{yt}}$

Explanation of the parameters

The mathematical formulation of Okun's law has two main parameters, and . These should be explained using the example of Germany. ${\displaystyle {\overline {g}}_{y}}$ ${\displaystyle \beta }$

Factors influencing normal production growth

There can be various reasons why positive economic growth does not automatically lead to falling unemployment. From 2004 to 2005, the workforce grew by around 1%. This means that employment would have to increase by at least 1% so that the unemployment rate remains constant and does not rise. An increase in employment, in turn, causes a growth in production .

In addition, the productivity of employees is increasing continuously. In 2005 it increased by 1.3% compared to the previous year. In order to employ the same amount of manpower, production would have to be increased by at least 1.3%.

Together this would result in a necessary increase in production of at least 2.3% for the year 2004 to 2005 so that the unemployment rate does not rise.

Factors influencing the coefficient β

An increase in production above normal levels does not always lead to a decrease in the unemployment rate to the same extent. This can have different causes. On the one hand, a decrease in production does not automatically result in a corresponding reduction in the workforce. New hires are associated with increased costs, so that companies sometimes prefer to keep workers in phases of reduced production. On the other hand, if there are new hires, this does not lead to a reduction in the unemployment rate to the same extent. Due to the improved situation on the labor market, people who were not previously part of the working population are also applying . In such a case, the official unemployment rate is not reduced because the person concerned was not previously registered as a jobseeker. This means that only some of the new positions to be filled contribute to the reduction in the unemployment rate, which corresponds to a value of less than 1. ${\displaystyle \beta }$

Okun's law in a country comparison

The parameters of Okun's law differ from country to country and change over time. So you can see for the western industrial nations that it has increased. This means that companies in these countries are now reacting to fluctuations in demand with a more flexible hiring policy. on the other hand, has decreased, which means that new jobs will be created even at lower growth rates. Another reason for the drop in the employment threshold is the drop in population growth. With population growth of 1%, as was common in many industrialized countries in the 1960s, production must grow 1% faster than with a stagnating population in order to reduce unemployment. ${\displaystyle \beta }$ ${\displaystyle {\overline {g}}_{y}}$

country	1960-1990		1991-2007
	${\displaystyle \beta }$	${\displaystyle {\overline {g}}_{y}}$	${\displaystyle \beta }$	${\displaystyle {\overline {g}}_{y}}$
United States	0.38	3.57	0.32	2.95
GB	0.26	2.70	0.49	2.32
D (*)	0.23	3.56	0.51	1.68
France	0.15	4.30	0.48	1.96
Italy	0.06	4.13	0.14	1.26
Japan	0.03	6.13	0.18	1.69
(*) Up to 1990 only western Germany was considered. Source: own calculations (source of the data: AMECO database)

Critical consideration

Rudiger Dornbusch and Stanley Fischer seems to exaggerate the formulation of the connection observed by Arthur M. Okun as “law”, because the empirical connections are subject to a high degree of uncertainty. The parameter values ​​fluctuate over time and the observed relationships are sometimes unstable. In addition, normal production growth cannot be determined directly but has to be estimated. Fischer contrasts this approach with the nominal contracts .

Wilhelm Lorenz, Professor of Economics, refers to the variables productivity , working hours and labor supply , “which disrupt the direct relationship between the unemployment rate and economic growth. In fact, changes in these parameters and in the institutional framework over longer periods of time have a clear influence on the parameters described. "

Nevertheless, Okun's law is a suitable instrument for estimating the effects of economic growth on the reduction of the unemployment rate in an economy. Due to the simple linear relationship, it is very well known, especially among economic politicians. In addition, Okun's law provides significant indicators of the state of an economy and a way of forecasting future changes in the unemployment rate.

literature

• Olivier Blanchard, Gerhard Illing: Macroeconomics . 4th edition. Pearson Studies, Munich 2006, ISBN 978-3-8273-7209-3
• Michael C. Burda, Charles Wyplosz: Macroeconomics: A European Perspective . 2nd Edition. Verlag Franz Vahlen, Munich 2003, ISBN 3-8006-2856-2
• Rüdiger Dornbusch, Stanley Fischer: Macroeconomics . 6th edition. R. Oldenbourg Verlag, Munich 1995, ISBN 3-486-22800-5
• Helge Majer: Modern Macroeconomics: Holistic View . Oldenbourg Verlag, Munich 2001, ISBN 978-3-486-25549-2
• Arthur M. Okun: Potential GNP: Its Measurement and Significance . In: American Statistical Association (Ed.): Proceedings of the Business and Economic Statistics Section , 1962, pp. 98-104

Web links

• M @ kro Online - Okun's Law
• Arthur M. Okun: Potential GNP: Its Measurement and Significance . ( Memento of September 7, 2006 in the Internet Archive ) (PDF, 562 kB)
• Okunsches law - definition in Gabler Wirtschaftslexikon

Individual evidence

1. ^ Michael C. Burda, Charles Wyplosz: Macroeconomics: A European Perspective . 2nd Edition. Verlag Franz Vahlen, Munich 2001, pp. 304-305
2. ↑ ^{a b c d e} Source of the data: Macroeconomic Database of the European Commission (2007) AMECO; accessed: March 30, 2008
3. ↑ Growth in production and change in unemployment . Friedrich Ebert Foundation .
4. ↑ ^{a b c d} Olivier Blanchard, Gerhard Illing: Macroeconomics . 4th edition. Pearson Studium, Munich 2006, pp. 264–269
5. ^ Rüdiger Dornbusch, Stanley Fischer: Macroeconomics . 6th edition. R. Oldenbourg Verlag, Munich 1995, pp. 20-22
6. ↑ ^{a b} Wilhelm Lorenz (Ed.): M @ kro Online - Okuns Law. Retrieved March 30, 2008

This version was added to the list of articles worth reading on June 4, 2008 .