Okun’s Law: Is it broken?
Okun’s Law suggested that an increase in output would imply a fall of unemployment, and the relation was often assumed to be a 2:1 ratio in more recent times. Jon Hilsenrath suggested recently, in a WSJ blog, that the relation is broken. He argues that the average growth between 2007 and 2009, the recession years, was around 2.5% below its trend (the actual growth was slightly negative, around –0.22% in the three years), and that Okun’s Law would have implied and increase of unemployment of approximately 5% (he says little more than 5%, from 4.4% to 8.9%” [sic]), but it increased more, reaching 10.1% in October 2009. That is the basis for the claim that the law is broken. In fact, the average annual unemployment increased from 4.6% in 2007 to 9.6% in 2010, precisely 5%. His fears about the breakdown in the recovery are also exaggerated. What is really surprising is that he thinks that: “unemployment seems to be falling sharply.” I need to find these rosy goggles WSJ bloggers use.