Okun's Law

Okun's law describes a relationship between employment and output/gross domestic product for a country. The following chart illustrates there is generally a negative relationship between the change in the unemployment rate and the change in GDP growth.

A constant coefficients model has flaws because of the significant variation in the relationship over time. The following chart illustrates the relationship between the change in the unemployment rate and the change in GDP growth over time, for example over periods of high and low inflation and changes in labour market structures.

Okun's Law and Potential Output

Time-varying Coefficients Model has the measurment equation:

where:

• is the 1 quarter change in the unemployment rate (all persons);
• is the two-quarter annualised growth in log real (chain volume) gross domestic product;
• is the annualised growth rate of potential gross domestic product;
• is the annualised two-quarter change in log real unit labour costs.

Supported by two state transition equations:

and are fixed parameter estimates subject to Kalman updating based on each new observation in time (the cumulative sample average).

The latest estimates through to compared with those estimated in 2015 are provided below: