Enter the actual GDP and potential GDP (and an Okun coefficient) into the calculator to estimate the unemployment gap using Okun’s Law. To estimate the unemployment rate, add an estimate of the natural rate of unemployment.

Okun’s Law Calculator

Enter any 3 values to calculate the missing variable

Note: The unemployment gap is typically expressed in percentage points (e.g., 1.25 means 1.25 percentage points above the natural rate).

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Okun’s Law Formula

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

u - u^* = a \cdot \frac{Y - Y^*}{Y^*}

Variables:

  • u − u* is the unemployment gap (the difference between the actual unemployment rate and the natural rate), typically in 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* 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*). You can check intermediate values with the calculator above.

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