Tuesday, March 9, 2010

Okun's Law

In the past couple of months, I've put up two posts on Okun's Law, the relationship between output and unemployment. I stand by my earlier recommendations on the articles in those posts. But I must also draw your attention to this item from the Federal Reserve Bank of San Francisco's Economic Letter.

It seems that the relationship didn't hold true in 2009. Output rose by unemployment did not fall, largely due to improving worker productivity.

This is what Russ Roberts of Cafe Hayek meant when he asked "Is the Dismal Science Really a Science" in this piece for The Wall Street Journal (subscriber content). (You might want to put the article title in your search engine. You may find the complete article.)

Russ points out that economic "laws" are not capable of unerringly forecasting human behavior. This is an excellent example. It doesn't mean that Okun's Law has no value, just that you can't always tell what people are going to do.  I welcome your thoughts.


rjs said...

i saw the SF Fed letter; my first thought was that they had the cart before the horse; that its unemployment that causes apparent productivity to rise..

Mike Fladlien said...

Okun was first to admit that his law was an empirical one. A data set might have an "outlier" that skews the data to the right or to the left. One observation doesn't change the relationship. Thanks for this post.

Megan M. Orama said...

If more people are unemployed, less people pay taxes or have money for spending. Spending money boosts the economy through taxes which is why everything is taxed.