|For Release:||October 1, 1997|
|Contact:||John Martin, 216/579-2847 or June Gates, 216/579-2048|
The Commentaryís authors, economists David Altig, Terry Fitzgerald, and Peter Rupert, say that while historically there has been a negative correlation between output and unemployment, the relationship changes over time and has sometimes failed altogether. The authors emphasize that the output of an economy does not depend directly on the unemployment rate, but on a nation's labor force, its capital stock, and the level of technology.
Unemployment is related to GDP through the labor services channel, and the more complex relationship between output and labor services must be considered in assessing whether declines in unemployment at a given rate of GDP growth indeed signal increasing price pressures.
Altig, Fitzgerald, and Rupert say that the other factors which determine labor resource utilization, such as productivity, have often tended to undermine quantitative representations of Okun's Law. They show, in fact, that changes in productivity have produced results contrary to what Okun's Law would suggest.
Although Okun's Law expresses a general relationship between changes in unemployment growth and changes in output, the authors say it is not, and was not intended to be, an immutable law. Recognizing the instability in the unemployment/output relationship, they say, can go a long way toward helping us understand that an economy operating at low and falling unemployment, with robust growth and stable inflation, may be a very plausible and happy circumstance.
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