Sunday, January 31, 2010

Okun's Law, In the News

The AP reports:
Mark Zandi, chief economist at, and Bill Cheney, chief economist at John Hancock, agree that the economy would have to grow roughly 5 percent for all of 2010 just to ratchet down the average unemployment rate for the year by 1 percentage point — to a still-high 9 percent.

Their math is based on Okun's law, named for economist Arthur Okun. In 1962, Okun produced a formula for the connection he saw between unemployment and economic activity.

Though, as Brad DeLong pointed out recently unemployment has actually been worse than Okun's law would imply.


David Smith (dhsmith24) said...

Looks like comments are not moderated and I can post anything. "Do not pay for white teeth!!!"

But seriously, Okun's Law, yes, it's as bad as that or as Brad DeLong says worse. I assume that's why the administration's budget has put in such high GDP growth assumptions for the next couple of years, because they need to be able to plug in an optimistic unemp number or else the deficit is even far more shocking.

Deeply concerning.

Bill C said...

Thanks. Its moderated, but somewhat lazily [I just deleted two spam comments].

Here's an optimistic take - possibly the strong productivity numbers mean there has been less of the usual "labor hoarding" that occurs during downturns (e.g., keeping people on payroll to sweep out the factory), and therefore, as output growth picks up, firms will have to hire more workers, rather than increase the work from people already on payroll.