Okun's Law

Written By
Paul Tracy
Updated November 4, 2020

What is Okun's Law?

Named after economist Arthur Okun, Okun's law states that for every 1% increase in the employment rate, gross domestic product increases 3%.

How Does Okun's Law Work?

Let's say the unemployment rate decreases by 2% (that is, employment increases by 2%). According to Okun's law, GDP will increase by 6%.

Okun's law, however, only applies to the U.S. economy and only applies when the unemployment rate is between 3% and 7.5%.

Why Does Okun's Law Matter?

Okun's law reinforces the notion that a country's output depends on labor. It is also a way to measure the effectiveness of monetary policy. Although the law only applies in the United States, the concept applies in all economies (that is, when more people have jobs, the economy is stimulated). Accordingly, a 1% change in employment may result in a different degree of increased output in other countries.

Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Okun's Law.
Be the first to ask a question

If you have a question about Okun's Law, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Okun's Law, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Okun's Law

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms