rsingh said:
Hey guys, I've seen Okun's Law at a few places.
But what the heck is it? I have no idea what it is?
The law states:
Economic Growth > Productivity Growth + Labourforce Growth
for unemployment to fall .... ??
Can someone please explain, and is it essential we know it?
It's not essential that you know it, the law is just another method of explaining that increases in productivity and labourforce growth must be matched with economic growth. This is because if a company is more productive they can get less workers to produce the same output. Naturally, they want to maintain profitability so some workers will be fired. However, if there is an increase in aggregate demand and subsequently an increase in economic growth, these companies will be pushed to produce more. This means there will be less chance these workers will be made redundant. Similarly if the labourforce grows and the economy stays the same, no new jobs will be created and the extra people will remain unemployed.
However, it is important to note that Okun's law does not always work as it is a theoretical example. If an economy is already near the natural rate of unemployment than increases in economic growth can do little to reduce the unemployment figure. Instead this will increase inflationary pressures on the economy. This is why Australia attempts to achieve a sustainable level of economic growth of between 3.5-4%
