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.