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Decomposing Okun’s law: evidence for the United States, 1970–2021

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  • Oscar Peláez-Herreros

Abstract

This letter demonstrates that Okun’s relationship between the change in the unemployment rate and the percentage change in output can be expressed as a factorial decomposition and that, consequently, Okun’s coefficient is an estimate of the employment rate plus a bias due to the omission of relevant variables. This has been ignored by previous research, which started from a simplified formulation. In the United States from 1970 to 2021, we obtained an Okun coefficient of −0.475. This value is the sum of a sign-shifted estimate of the employment rate (−0.917) plus the indirect effects of the percentage change in the output per hour worked (0.076), hours worked per employed person (0.169), participation rate (0.149), and working age population (0.048). This decomposition helps to understand the relationship between the economic growth and the unemployment rate together with all the variables that condition it.

Suggested Citation

  • Oscar Peláez-Herreros, 2025. "Decomposing Okun’s law: evidence for the United States, 1970–2021," Applied Economics Letters, Taylor & Francis Journals, vol. 32(1), pages 121-124, January.
    • Handle: RePEc:taf:apeclt:v:32:y:2025:i:1:p:121-124
    DOI: 10.1080/13504851.2023.2257927
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