Discussion Paper

Okun’s Law and Long Expansions

Abstract: Economic forecasters frequently use a simple rule of thumb called Okun's law to link their real GDP growth forecasts to their unemployment rate forecasts. While they recognize that temporary deviations from Okun's law may occur, forecasters often assume that sustained reductions in the unemployment rate require robust GDP growth. However, our analysis suggests that Okun's law has not been a consistently reliable tool for predicting the size of declines in the unemployment rate during the last three expansions—a finding that reflects the impact of changes in the labor market since the early 1960s. We also find that the percentage declines in the unemployment rate over the third through fifth years of the last three expansions have been strikingly similar—a pattern that suggests an important role for flows into and out of unemployment in explaining movements in the unemployment rate, the subject of tomorrow's blog post.

Keywords: expansions; economic growth; labor market flows; Okun's Law; unemployment rates;

JEL Classification: E2;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2012-03-27

Number: 20120327