For any country, it is very important to know the number of people who are active in employment or unemployed. The okun's law, is a linear correlation that is established between the unemployment rate and the real production or GDP present in the country.
It is known that it is through jobs that countries can achieve increased production, thereby meeting the needs in each area of their economy. The opposite case, that is, to know the unemployment or unemployment levels of the population, which is able to and of age to produce but who does not have a job, is closely related to the decline of the economy in the countries.
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In this sense, through this law we can relate these variables, so it is very important to estimate the rates or levels of unemployment and the productive capacity of the countries.
In this article you will find:
Origin of Okun's law
It originates in 1962, thanks to the economist Arthur Okun, who in a written article highlighted this relationship. Showing in the same as during the most difficult times in the economies of the countries, production and consumption levels drop.
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For this reason, the investments of entrepreneurs are reduced, which affects a decrease in the availability of jobs.
As there is no production in response to a drop in demand, it is not necessary to employ workers in each of these processes. Usually in these times, sales drop and unemployment levels rise. The percentage relationship between these variables (Gross Domestic Product and unemployment rate) is negative.
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Importance
Okun's law is very useful in economics and finance. At a general level, it highlights that the growing economy and the increase in the population that drives production, makes decrease unemployment.
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With the passage of time, other studies have been incorporated that show that this law has only one level of orientation, since other studies have been presented. However, the major difference between these is centered on the way to calculate the variation in unemployment and the calculation of the production.
Advantages and disadvantages
Among the advantages of Okun's Law, are noted:
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- It allows estimating how much the economy of a country should grow annually, to achieve maintenance of employment rates.
- It indicates that the percentage values between which they must be located (2.6 and 3). If growth is below these, the unemployment level can be expected to rise.
- Thanks to this law, it is known that, with a 3% growth in the economy, employment levels can be maintained.
- It also allows us to know that to lower the unemployment or unemployment rate, it is necessary to increase 2% in the economy, for each one of the% points that you want to lower the rate in question.
Disadvantages
- Despite having been very reliable in macroeconomics, it is effective if the unemployment rate is between 3 and 7.5 percentage values. To know the precise percentage value, the period of time and the nation to be evaluated must be known.
- Some cases indicate that it is not a law, only an empirical rule. Well, it is based on the statistical estimation that occurs between your data.
- Experts point out as a negative aspect that the coefficient cannot be predicted.
Okun's law formula
The relationship for the calculation is based on the following formula:
ΔY / Y = k - cΔu
Where:
Y = to real production (GDP).
ΔY = to changes in production levels.
C = at a constant value that makes it possible to relate unemployment and production.
K = a the annual percentage growth of full employment production.
Δu = a represents the change or variability in the unemployment or unemployment rate.
Conclution
Finally, it should be noted that Okun's law is based primarily on the relationships that exist in a growing economy, where there is stability in the working population and where it is considered that it is necessary to increase the number of employees so that production levels increase, that is why the levels of unemployment.
This law presents the negative relationship between the unemployment rate and the real Gross Domestic Product.
For economists and in general for a country it is very useful and important to know how its economy grows, its employment and how unemployment or unemployment levels change. From the use of the Okun's Law, it is possible to know how much the GDP of a nation loses when the level of unemployment increases more than natural.
