Calculate Okun’s Law to estimate unemployment gap from GDP output gap or GDP gap from unemployment in either direction using a coefficient.

An empirical approximation. Coefficients vary by country and period; the preset values are illustrations.

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Okun’s Law Formula

The following formula is used to calculate an unemployment gap estimate using Okun’s Law:

u - uast = a × (Y - Yast) / (Yast)

Variables:

  • u − u* is the unemployment gap (the difference between the actual unemployment rate and the natural rate), expressed as a fraction in this formula; the calculator displays percentage points
  • a is the Okun’s coefficient (often negative in this rearranged form; a common rule-of-thumb is about −0.5)
  • Y is the actual (real) GDP
  • Y* is the potential (real) GDP
  • u* is the natural rate of unemployment (an estimated baseline)

To estimate the unemployment gap with Okun’s Law, compute the output gap (Y − Y*)/Y* as a fraction and multiply by the Okun coefficient a. If you want the unemployment rate u, add the natural rate: u = u* + (u − u*).

What is Okun’s Law?

Okun’s Law is an empirically observed relationship between unemployment and a country’s output relative to potential, named after Arthur Melvin Okun, who published the relationship in 1962. A common rule of thumb is that when unemployment is 1 percentage point above its natural rate, real GDP is roughly 2% below potential (i.e., the output gap is about −2%). The relationship varies by country, time period, and the exact definition used (levels vs. changes), so it is best treated as an approximation rather than a precise law.

How to Calculate Okun’s Law?

The following steps outline how to calculate Okun’s Law (output-gap form):

  1. First, determine the actual (real) GDP, Y. 
  2. Next, determine the potential (real) GDP, Y*. 
  3. Next, compute the output gap: (Y − Y*)/Y*. 
  4. Choose an Okun coefficient a (a common rule-of-thumb in this rearranged form is about −0.5) and compute the unemployment gap: u − u* = a · (Y − Y*)/Y*.
  5. If you need the unemployment rate, add an estimate of the natural rate: u = u* + (u − u*). Select the gap to solve for above. Enter the known gap in percent or percentage points, or choose fraction units; the calculator reports a gap rather than the actual rate.

Example Problem : 

Use the following variables as an example problem to test your knowledge.

Okun’s coefficient (a) = -0.50; actual GDP (Y) = 19.5 trillion; potential GDP (Y*) = 20.0 trillion

Output gap = (19.5 − 20.0) / 20.0 = −0.025 = −2.5%; unemployment gap (u − u*) = (−0.50) × (−2.5%) = +1.25 percentage points