Instant Econometrics Project 1

Okun's law is an empirical relationship between the change in the unemployment rate and the percentage growth in real output, as measured by GNP. Arthur Okun estimated the following relationship between the two:

Y_t = - 0.4 (X_t - 2.5 )

This can also be expressed as a more traditional linear regression as:

Y_t = 1 - 0.4 X_t

Where:
Y_t is the change in the unemployment rate in percentage points.
X_t is the percentage growth rate in real output, as measured by real GNP.

For an econometrics paper, you can see if this relationship holds in the United States. You can use quarterly data that be can downloaded at:

About Economics - Quarterly Economic Data Page

The data is in Microsoft Excel format, but you should be able to convert it to any econometrics program you'd like.

You should consider the following issues in your paper:

• Do you get coefficients which are significantly (in a statistical sense) different from the ones in Okun's Law? Are the coefficients significantly different than zero?
• Does it make a difference whether or not you use Real GNP or Real GDP?
• Does Okun's law hold for some time periods, but not others?
• Does Okun's law do a reasonable job of explaining changes in the unemployment rate?

In order to write your paper, you should learn more about Okun's Law. Here are a few links that should help you:

• Okun's Law Revisited: Should We Worry about Low Unemployment?
• Growth and Unemployment - Okun's Law
• Okun's Law (Great List of Sources!)

As always, if you have any questions or comments, feel free to e-mail me.