Definition
Okun's law is an empirical rule of thumb describing the relationship between unemployment and economic output. Named for economist Arthur Okun, it states that when the unemployment rate rises, real output falls by a larger proportional amount.
A common version says that for every one percentage point that unemployment rises above its natural rate, output falls roughly two to three percent below its potential. The exact ratio varies by country and era, so the law is treated as an approximation rather than a precise formula.
Why it matters
How it works
Output falls by more than unemployment rises because joblessness is only part of the story. In a downturn, firms also cut hours, leave positions unfilled, slow hiring, and use existing staff less intensively. These hidden adjustments add to the measured rise in unemployment.
Because the relationship is empirical, the coefficient drifts as labor markets and technology change. Okun's law works best as a quick cross-check on forecasts, not as a structural model of how the economy operates.