To analyze the economic situation, Ouken's law is often used. The coefficient that was derived by the scientist characterizes the ratio between the unemployment rate and growth rate. It was discovered on the basis of empirical data in 1962 by a scientist, in whose honor it was named. Statistics show that an increase in unemployment of 1% leads to a decrease in actual GDP from potential by 2%. However, this ratio is not constant. It may vary depending on the state and time period. The ratio between quarterly changes in the unemployment rate and real GDP - this is Oaken's law. The formula, it should be noted, is still being criticized. Its usefulness for explaining market conditions is also being questioned.
Oaken's Law
The coefficient and the law behind it appeared as a result of processing statistical data, that is, empirical observations. It was not based on the original theory, which was then tested in practice. Arthur Melvin Ouken saw the pattern by studying statistics for the United States. She is approximate. This is due to the fact that many factors affect the gross domestic product, not just the unemployment rate. However, such a simplified consideration of the relationship between macroeconomic indicators is sometimes also useful, as Ouken’s research shows. The coefficient derived by the scientist reflects an inversely proportional relationship between output and unemployment. Ouken believed that a 2% increase in gross domestic product was due to the following shifts:
- a fall in the level of cyclical unemployment by 1%;
- employment growth of 0.5%;
- an increase in the number of working hours for each worker by 0.5%;
- productivity growth of 1%.
Thus, reducing Ouken’s cyclical unemployment rate by 0.1%, one can expect an increase in real GDP of 0.2%. However, this ratio varies for different countries and time periods. Dependence has been tested in practice for both GDP and GNP. According to Martin Pracovni, a 3% reduction in production is due to a 1% decrease in unemployment. However, he believes that this is only an indirect dependence. According to Prachovny, other factors, for example, utilization of production capacities and the number of labor hours, do not affect unemployment more than production. Therefore, you must discard them. The pratchivniki calculated that a 1% decrease in unemployment leads to an increase in GDP of only 0.7%. Moreover, the dependence is becoming weaker over time. In 2005, an analysis of recent statistics was conducted by Andrew Abel and Ben Bernarke. According to their estimates, an increase in unemployment of 1% leads to a drop in production by 2%.
Causes
But why do GDP growth rates exceed the percentage change in unemployment? There are several explanations for this:
- The effect of the multiplier effect. The more people employed, the greater the demand for goods. Therefore, production volumes can grow at a faster rate than the level of employment.
- Imperfect statistics. Unemployed people may simply stop looking for work. If this happens, then they disappear from the "radar" of statistical agencies.
- Again, actually employed people may start working less. In statistics, this is practically not displayed. However, this situation significantly affects the volume of production. Therefore, with the same number of employees, we can actually get different gross product indicators.
- Decrease in labor productivity. This may be due not only to the deterioration of the organization, but also to an excessive number of employees.
Oaken's Law: Formula
We introduce the following conventions:
- Y is the real volume of production.
- Y 'is the potential gross domestic product.
- u - real unemployment.
- u 'is the natural level of the previous indicator.
- c is the Ouken coefficient.
Given the above conventions, the following formula can be derived: (Y '- Y) / Y' = c * (u - u ').
In the United States, starting in 1955, the latter indicator was usually 2 or 3, as shown by the above empirical studies. However, this version of Ouken’s law is rarely used because the potential levels of unemployment and gross domestic product are difficult to assess. There is another version of the formula.
How to calculate GDP growth
To calculate the GDP growth rate, we introduce the following conventions:
- Y is the actual volume of output.
- ∆u - change in the actual unemployment rate compared to last year.
- C is the Ouken coefficient.
- ∆Y - change in actual output compared to last year.
- K - average annual production growth at full employment.
Using these notations, we can derive the following formula: ΔY / Y = k - c * Δu.
For the modern period in the history of the USA, the coefficient C is 2, and K is 3%. Thus, the equation is derived: ΔY / Y = 0.03 - 2Δu.
Using
Knowing how to calculate the Ouken coefficient often helps in building trends. However, the resulting numbers are often not very accurate. This is due to the variability of the coefficient for different countries and time periods. Therefore, one must take into account the predictions of GDP growth due to job creation with some skepticism. Moreover, short-term trends are more accurate. This is due to the fact that any market changes can affect the coefficient.
