U.S. output growth declined less than in most other industrialized countries while U.S. unemployment rose higher and faster than it did in most other major industrialized countries.Unemployment

Christopher J. Neely

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2010 ￿ Number 4
D
espite the popular emphasis on the U.S. housing
price bubble and domestic monetary and regula-
tory policies, the recession has been a worldwide
phenomenon with varying effects across countries. For
example, the chart shows that from 2008:Q2 to 2009:Q3
U.S. output growth declined less than in most other indus-
trialized countries while U.S. unemployment rose higher
and faster than it did in most other major industrialized
countries.
Output and employment commonly move together. In
1962 Arthur Okun documented that U.S. unemployment
tended to fall by 1 percentage point for every 3-percentage-
point rise in gross national product (i.e., output); observers
subsequently dubbed this empirical regularity “Okun’s
law”1—thus, the United States had an Okun coefficient of 3.
Output might logically be expected to move approximately
one for one with employment, yet Okun argued that meas-
ured unemployment is less volatile than output because
fluctuations in hours per worker and labor force
participation hide some underemployment.
Economists have long noted that most industrial-
ized countries have larger Okun coefficients than do
the United States and—to a lesser extent—Canada and
the United Kingdom.2 In other words, most industrial-
ized countries’ unemployment rates tend to vary less
for a given gross domestic product (GDP) fluctuation
than does that of the United States. The usual expla-
nation for this is that the United States, Canada, and
the United Kingdom have less heavily regulated labor
markets in which businesses can more easily lay people
off during slowdowns. Most countries have some
combination of stronger implicit social job protec-
tions (e.g., Japan), stronger unions, or greater formal
restrictions on releasing workers.
The Organisation for Economic Co-operation
and Development (OECD) compiles an employment
protection index that measures how easily employers
in various countries can terminate workers or hire
temporary workers. The United States, Canada, the
United Kingdom, Japan, Germany, and France rank
1, 2, 3, 7, 22, and 25, respectively, among 30 OECD
countries in labor market flexibility. The relatively low levels
of labor market regulation in the United States and Canada
are consistent with their relatively large increases in unem-
ployment in the recent recession.
Okun coefficients can change over time because the
relationship of unemployment to output growth depends
on laws, technology, preferences, social customs, and demo-
graphics. Some economists have suggested that labor market
Okun’s Law: Output and Unemployment
Christopher J. Neely, Vice President and Economist
U.S. output growth declined less than
in most other industrialized countries
while U.S. unemployment rose higher
and faster than it did in most other
major industrialized countries.
Okun’s Ratios: 2008:Q2–2009:Q3
4
6
5
3
2
1
0
–1
Unemployment Rise (percentage points)
Cumulative GDP Fall (percent)
0 123 4 5 6 7 8 9 10
United States
United Kingdom
France Canada
Japan
Germany
NOTE: Combinations of cumulative GDP declines and unemployment increases 
from 2008:Q2 through 2009:Q3 for six industrialized countries. All data are from 
the OECD.reforms have made most industrialized countries more like
the United States, with smaller Okun coefficients.3 The
chart shows, however, that the United States still has had
the largest change in unemployment per unit of output in
the recent recession.
While job stability is a good thing, economics often
requires trading one good for another. Restrictions on dis-
missing workers make firms more reluctant to hire workers
in the first place. There  fore, countries that heavily regulate
labor markets tend to have higher unemployment. Since
1989, for example, U.S. monthly unemployment has averaged
5.55 percent while German and French unemployment rates
have averaged 7.93 and 9.62 percent, respectively. There is
no free lunch with more labor market regulation. ￿
1 Okun, Arthur M. ‘‘Potential GNP: Its Measurement and Significance.” 
In: Proceedings of the Business and Economic Statistics Section of the American
Statistical Association. Alexandria, VA: American Statistical Association, 1962, 
pp. 89-104.
2 Kaufman, Roger T. ‘‘An International Comparison of Okun’s Law.’’ Journal of
Comparative Economics, June 1988, 12(2), pp. 182-203; and Moosa, Imad A. 
“A Cross-Country Comparison of Okun’s Coefficient.” Journal of Comparative
Economics, June 1997, 24(3), pp. 335-56.
3 Lee, Jim. “The Robustness of Okun’s Law: Evidence from OECD Countries.”
Journal of Macroeconomics, Spring 2000, 22(2), pp. 331-56.
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
Posted on February 3, 2010
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Okun's law: output and unemployment

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Okun's law: output and unemployment

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