What is the relationship described by Okun's Law?

Okun's Law illustrates the empirical relationship between unemployment and economic output (GDP). Specifically, it posits that when unemployment rises by 1 percentage point, the economy's output decreases by approximately 2 percent. This law reflects the idea that higher unemployment translates to lower productivity and a reduced level of goods and services produced.

The rationale behind this relationship is grounded in the understanding that unemployed individuals represent a loss of potential labor that could otherwise contribute to economic activity. Thus, as more people find themselves without jobs, the overall output diminishes significantly due to lost contributions to production and consumer spending.

This relationship helps economists and policymakers grasp the impact of labor market dynamics on economic performance, guiding decisions related to fiscal and monetary policy aimed at boosting employment and, by extension, stimulating economic growth.