Okun's Law
Plain definition
The empirical relationship that for each percentage point unemployment rises above its natural rate, real GDP falls roughly 2 percent below potential GDP.
In economics
Okun's law links the labor market to output: the GDP gap is about twice the unemployment gap (with a negative sign). Policymakers use it to translate unemployment forecasts into output forecasts and to judge how much demand stimulus is needed to close a given GDP gap.
Example
If the natural rate of unemployment is 4% but actual unemployment is 6%, the unemployment gap is 2 points. Okun's law predicts real GDP is about 4% below potential GDP. Closing that gap would require enough demand growth to bring unemployment back toward 4%.
Okun's law is confused with an exact formula. It is an empirical rule of thumb, roughly 2-to-1, that varies across countries and time periods; it is not a theoretical identity. It also describes gaps relative to potential, not the raw levels of unemployment and GDP.