Okun's Law _ China Economic Network - National Economic Portal

Okun's law

11:00, July 29, 2011 Source: China Economic Network

Okun's Law: For every 1 percentage point higher than the natural unemployment rate, the actual GDP will be lower than the potential GDP by 2 percentage points.

Conclusion: The real GDP must grow as fast as the potential GDP to prevent the rise of unemployment rate.

Okun, A.M. (1962) 'Potential GNP: Its Measurement and Significance

It is the basis of macroeconomics and an important basic tool for analyzing macroeconomic fluctuations. However, Okun's Law in its direct form is not valid in China, and the unemployment data that is generally attributed to China is not accurate, so it needs to be transformed and indirectly studied using Okun's Law and Phillips Curve. Due to the inaccurate understanding of Okun's Law, serious errors occurred in the process of deformation and wrong conclusions were drawn. This kind of misunderstanding is not only easy for beginners to make, but also very serious in China's economic circles, including some famous economists, and it can be said that it has still not received enough attention. Now I will explain why the two explanations of NPC Gao Hongye and Wu Hanhong are correct and equivalent, while the explanation of Jiang Cai and He Jianchun is wrong.

Okun's rule is essentially a rule of thumb, and is known as one of the most useful rules of thumb in macroeconomics, but also has theoretical basis. This can be started from a simple production function: Y=aN, where Y represents output, a represents labor productivity, and N represents employment. The subscript with time t represents the actual value, while the subscript with n represents the potential value. L is the total labor force, U is the number of unemployed people, and N=L-U is substituted into the production function. Y=a (L-U), the actual output is divided by the potential output to get: Yt/Yn=at (Lt UT)/[at (Lt UN)]=(1-ut)/(1-un), and subtract 1 from both sides at the same time to get: (Yt Yn)/Yn=- [1/(1-un)] (ut un), where ut=Ut/Lt, un=Un/lt, respectively, represents the actual unemployment rate and the natural unemployment rate.

In the short term, we usually assume that un is a constant, and 1/(1-un) is close to 1, so we can get: (Yt Yn), It is the result of estimation. Therefore, the exact form of Okun's rule should be: ut un=- β [(Yt Yn)/Yn], where β>0. Therefore, "Okun's Law: if the unemployment rate is 1% higher than the natural unemployment rate, the actual output is about 3% lower than the potential output" is true. That is, β=1/3. This is the case of the United States. In fact, countries are very different. In China, it is worth further studying, because China is a developing country with an obvious dual economy.

Another explanation:

Assuming that un is a constant, Yn is a variable. Calculate the differential of time for ut un=- β [(Yt Yn)/Yn] to get: △ ut=- β (Yt/Yn) (△ Yt - △ Yn/Yn), where △ represents a difference sign, such as △ ut=ut-u (t-1), △ Yt/Yt is the actual growth rate, and △ Yn/Yn is the potential growth rate. The potential growth rate shows the growth rate caused by population growth and technological progress, which is usually assumed to be a constant in the short term, For example, 3%. This is Wu Hanhong's explanation that "the change of unemployment rate=- 1/2 (the change percentage of real GDP - 3%), that is, when the real GDP growth rate is 3%, the unemployment rate remains unchanged", but that β=1/2.

(Editor in charge: s)