Okun's Law describes the relationship between unemployment and economic output, where a 1% increase in unemployment is associated with a 2% decrease in output relative to potential output. The document discusses how Okun's Law has been calculated for the United States, with unemployment 1% above the natural rate leading to output falling 2% below potential. It also notes that while unemployment is above the natural rate in Ghana, causing output to fall below potential there as well. An example is given for Ghana in June 1983, showing a 3.33% recessionary gap between actual and potential output.

1. Okun’s Law: Output and Unemployment
By
Dr. Paul Onyina

2.  How much output is forgone with cyclical
unemployment? This is the basic question answered by
Okun’s ‘Law’
Okun’s Law:
◦ Each extra percentage (1%) point in unemployment is
associated with some (%) increase in the output gap (or some
change in (Y) actual output.
◦ The size of this relationship is estimated by economists. It is
based on this relationship over time in a particular country.
◦ The size of this response gives us some information about the
responsiveness of output to changes in cyclical unemployment.

3.  For the United States this relationship has
been calculated using real GDP and
unemployment data. It has been found that
an unemployment rate which is 1% above the
natural rate of unemployment (u*) will cause
Y to fall below potential by 2%
 However, for Ghana, unemployment rate is
above the natural rate of unemployment (u*),
this causes Y to fall below potential.

4. In symbols:
= –β (u – u*)
- where y is the actual output and y* is the full-
employment level of output
- where β is 2 for the US.
- β varies based on the country.
*
*
y
yy 

5. Example: June 1983 (Currency in US$)
Ghana u = 10.3%, u* = 8.08%,
y* = $108 213.6 million, if –β (u – u*).
then (let B= 1.5)
–β (u – u*) = –1.5 (0.103 – 0.0808) = –0.0333
Therefore, the output gap was –3.33% of y*
= 3.33% x $108 213.6 million
= $3603.51 million
This is a recessionary gap (negative sign).