Question

During the second semester of 2009 and the first semester of 2010 the GDP growth rate became positive. However, percentage changes in the GDP growth rate were not matched by half percentage point decreases in the unemployment rate during that period. Would this suggest that Okun’s law is no longer valid?

Answer 1

Okun's law is empirically observed result rather than based on a theory . Okun's law is an approximate measure since factors other than employment affect output . It may be the case that productivity of efficiency of existing workers have increased which have caused rise in GDP . So unemployed people did not find jobs but output increased due to rise in productivity . There can be several other factors like technological innovation etc which can raise output but not reduce unemployment at the same time . So Okun's law does not prove to be invalid but is affected by other factors .