Arthur Okun was born November 28, 1928, in Jersey City, New Jersey. Little is known, or found, about his early life. He received a BA at Columbia University. Seven years later, he received his PhD at the same institution. Shortly afterwards, he became a professor at Yale University. A few years later, he was made a member of Kennedy's Council of Economic Advisors. By the end of President Johnson's administration, he was chairman of the CEA.
While he was a senior economist with the CEA, he formulated his most famous contribution to economics, Okun's Law, which describes the inverse relationship between the change in the rate of unemployment, and the difference between the actual and potential real GDP. His law basically states that for every one point increase in actual rate of unemployment over the natural rate of unemployment, the real GDP value is reduced by two to three percent. Likewise, as real GDP value is increased, the actual rate of unemployment decreases. The real GDP is the GDP adjusted for inflation and prices changes, and the natural rate of unemployment is a calculated rate of unemployment based on the Philips Curve. Essentially, if the actual rate of unemployment falls below the natural rate, inflation increases, and if it rises over the natural rate, inflation decreases. A graph that illustrates the Okun's Law follows:
As one can see, it is possible to draw a line of best fit from the plotted values, clearly indicating an inverse relationship. A mathematical equation for the law is:
In this equation, y-bar is the full employment output, y is the actual input, c is a constant, u is the actual unemployment rate, and u-bar is the natural unemployment rate.
Okun's Law is an empirical observation based on empirical data he collected from WWII to 1960. Okun himself stated that the law was only accurate within unemployment rates of 3 to 7.5 percent, which were the rates he collected from that time period. It is not a law based on economic theory or reasoning. Regardless, it has stood the test of time, as it is quite accurate and has strong predictive ability. A thing to note is that correlation does not imply causation and there are other factors other than unemployment that can affect GDP. Economists, though, are pretty certain that there is at least some degree of causal relationship between the two variables. There are many explanations as to why the rate of unemployment may affect the rate of GDP, including labor productivity, work hours, and size of the labor force.
Prior to the realization of Okun's law, the CEA wanted to convince President Kennedy to lower the rate unemployment from 7 to 4 percent, arguing that there are many gains. Okun's Law was used in persuading Kennedy, who eventually made major tax cuts.
In addition to his work with his famous law, Arthur Okun also advocated wealth transfers from rich to poor by taxation. Although he recognized such policies, he realized that they were nonetheless partly inefficient. He compared this to the leaky faucet in his famous analogy appearing in his book, Equality and Efficiency: The Big Tradeoff. In it, he wrote that money transfers from the rich to poor are done with a leaky faucet; inevitably, some of the money drips out. As a result, the poor never receive all of the money that is taken from the rich. He attributes several causes to this, including loss of incentive and to administrative costs of taxing and transferring. The poor have less incentive to work because they receive money through welfare, and the rich have less incentive to work because a large amount of their additional income is taken away. For his views, he is considered a supply-sider.
He later died of heart failure on March 28, 1980, in Washington D.C.
