Okun''s Law: The Relationship Between Unemployment and Economic Growth

Porras-Arena, M.S., Martín-Román, Á.L. (2023). Okun’s Law: The Relationship Between Unemployment and Economic Growth. In: Zimmermann, K.F. (eds) Handbook of Labor, Human Resources and Population Economics. Springer, Cham.

https://doi.org/10.1007/978-3-319-57365-6_433-1

Resumen: 

Okun’s law indicates the relationship between economic activity and unemployment. It allows quantifying the impact of changes in output on unemployment or the output gap relative to its potential level when idle labor resources vary. Therefore, it is a relevant relationship in macroeconomic terms and a factor to be taken into account in economic policy. In this chapter, the original formulations of Okun and the connection between them are presented, and then, some aspects noted by the extensive literature on the subject that emerged from the original work of Okun will be discussed. Many studies have focused on analyzing and quantifying how different countries, regions, and periods comply with the law, using some of the original formulations of the relationship, but there have also been studies that have contributed critical views and additional elements to take into consideration, questioning, for example, the linear relationship between the variables, the stability of the relationship, and the existence of omitted variables, among other aspects. Second, evidence is shown that indicates a high level of heterogeneity between the results of estimates between countries or regions or within the same country, and the results of some studies that attempt to explain this heterogeneity are discussed.