Okun's Law - Mathematical Statements

Mathematical Statements

The gap version of Okun's law may be written (Abel & Bernanke 2005) as:

, where

• is potential GDP
• is actual output
• is the natural rate of unemployment
• is actual unemployment rate
• is the factor relating changes in unemployment to changes in output

In the United States since 1955 or so, the value of c has typically been around 2 or 3, as explained above.

The gap version of Okun's law, as shown above, is difficult to use in practice because and can only be estimated, not measured. A more commonly used form of Okun's law, known as the difference or growth rate form of Okun's law, relates changes in output to changes in unemployment:

, where:

• and are as defined above
• is the change in actual output from one year to the next
• is the change in actual unemployment from one year to the next
• is the average annual growth rate of full-employment output

At the present time in the United States, k is about 3% and c is about 2, so the equation may be written

The graph at the top of this article illustrates the growth rate form of Okun's law, measured quarterly rather than annually.