Industrial Insight

15 October, 2013 14:20 | October 15, 2013

October 15, 2013

Okun’s Law Says We’re Growing Well Below Our Potential

By George Perry

In what came to be known as Okun’s Law, he estimated that a one percentage point higher unemployment rate was associated with three percent less GDP. Thus if unemployment was 2 points above its full employment level, GDP would be 6 percent below its potential level-defined as the level of GDP at full employment.

So how big is the gap between actual and potential GDP in today’s economy? The math could not be simpler. The 4.6 percent unemployment rate in the two years preceding the Great Recession are a reasonable estimate of full employment. Unemployment in the second quarter of this year was 3 points higher than that, so the output gap was about 6 percent of GDP, or roughly $800 billion.

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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.







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