Output and Unemployment: How Do They Relate Today?

In most economic models, the level of output that is produced is proportional to the level of the inputs-typically, capital and labor. Thus, one might imagine that increasing unemployment above its natural rate might be associated with output falling below its potential, and vice versa. This line of thinking led economist Arthur Okun to attempt to uncover a relationship between these two variables: (1) the difference between the actual level of output and its potential and (2) the difference between unemployment and its natural rate. As a byproduct of his study of potential and the natural rate, Okun discovered a strong empirical relationship between output growth and changes in the unemployment rate. Okun's law is a back-of-the-envelope method of translating changes in production to changes in the unemployment rate.