Okun’s Law: A Failing Industrial Age Economic Model

A popular traditional economic model has reportedly been losing its efficacy.

That’s according to the Wall Street Journal Blog, (bold emphasis mine)

In 1962, Yale professor Arthur Okun laid out in very clear and understandable terms a long-standing relationship between economic growth and the behavior of unemployment. If the economy dropped one percentage point below its long-term growth rate in a given year, the unemployment rate tended to rise by about a third as much. So a recession that pulled economic output three percentage points below the economy’s long-run trend would push the unemployment rate up by a percentage point.

Okun’s law has been a staple tool for economists ever since, but it’s been driving them crazy lately because it doesn’t seem to be working all that well.

The blog gives some possible reasons why the popular model can’t seem to explain today’s environment.

But they seem to overlook what matters.

Anyway here’s a clue from the same article...

Productivity – or output per hour worked by a country’s labor force — continued to rise in 2008, unusual for a recession, and surged by 3.7% in 2009

My bet is that economic models based on the industrial age will fall massively short of explaining the radical changes being brought about by the dramatic advances in technology that has been shaping the current economic framework.