Unemployment rises roughly in proportion to the shortfall of output below potential.
Okun's 1962 rule of thumb: a one-point rise in unemployment corresponds to roughly two points of output below potential. The coefficient varies by country and era but the relationship persists.
In practice
- A treasury watching unemployment rise two points knows roughly how much output has gone missing before any GDP figure is published.
- The coefficient varies by country and era, which is why it is a rule of thumb for reading a downturn rather than a parameter to forecast with.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys