Breaking Okun's Law
Disconnect My Reality
Okun’s Law states that for every 1% increase in the unemployment rate, a country’s GDP will be about 2% lower than its potential GDP. This means to quantify the relationship between GDP and unemployment; that is, a lower unemployment naturally corresponds to a higher GDP, or vice versa. Though not always perfect, this economic relationship has generally held since it was proposed in the 1960s.
It is not even close to holding any more. Unemployment has risen from 3.5% to 4.4% in 2025, with the best information we can get what with government statistics being increasingly questionable. So we would expect to see a natural decline in GDP growth of 2.8% in 2024, given the rise in unemployment. You can find statistics saying actual GDP growth is around 19% this year, which is basically in line with expectations and on track to push into recession.
But, well, the Trump folks are saying GDP is up over 3% this year and we are booming. And some of the statistics do seem to point that GDP may actually be up, even though unemployment is well up. How could this happen? If the economy is growing, how are there less jobs? Well, we kind of did this n 2008, though it will be even worse now.
2008 – the Jobless Recovery
Anyone old enough remembers seeing Lehman Brothers collapse, the stock market tumble, and the chaos that ensued. Everything seemed to be falling apart all at once. Apparently we had let everyone borrow everything and not bothered to check if anyone had a plan for repaying that debt (which if you are looking close enough at the great AI circle of investing, private loans are starting to repeat this feat). When it all came down, millions of people lost their jobs, and unemployment shot up to 10%. Many of the pieces written in 2009 & 2010, when the GDP started to recover and even grow but unemployment remained stubbornly high, talked of “skills mismatches” or outsourcing of the kinds of jobs we used to have here (notably manufacturing and back office work).1 And there is some truth to that. But that’s the lesson. We’re seeing something similar now, though without the collapse preceding it. And we are seeing it on purpose, to benefit a small handful of wealthy people at our expense as normal, working people.
Yeah it’s AI again.
AI deployments arguably are hit or miss; the now famous MIT report that 95% of generative AI pilots failing almost feels like a purposeful misdirect by now. Though it may be accurate; companies are reducing headcount in part to pay for AI, not just replace or consolidate work through AI. And it’s similar; back office work, even manufacturing controls and advanced robotics that can be fitted with AI can do more of the work now. But its finally coming for white collar jobs, the good paying jobs, like engineers and developers. This is great if you own assets, but most Americans don’t. And with regulation on AI now possibly illegal after Trump’s executive order, this is all likely to just get worse.
So, GDP growth can go up without dragging jobs along with it. This increasingly looks like the new reality. How does that change society? Does it, with how our social fabric has been fraying for years anyway? What do you think? Thank you for reading.