The relationship between Gross Domestic Product (GDP) and unemployment rates can be seen by the application of Okun’s Law. According to the principles established by this law, there is a corresponding two percent increase in employment for every established one percent increase in GDP. The reasoning behind this law is quite simple. It states that GDP levels are driven by the principles of demand and supply, and as such, an increase in demand leads to an increase in GDP. Such an increase in demand must be accompanied by a corresponding increase in productivity and employment to keep up with the demand.
GDP and unemployment rates are linked in the sense that both are macroeconomic factors that are used to gauge the state of an economy. A rise in the GDP is significant in the study of macroeconomic trends in a nation. This is also true of a rise or decrease in unemployment levels. GDP and unemployment rates usually go together because a decrease in the GDP is reflected in a decrease in the rate of employment.
Such a relationship between GDP and unemployment rates is important in two ways. A rise in employment levels is the natural result of increased GDP levels caused by an increase in consumer demand for goods and services. Such a rise in both GDP and employment levels is an indication that the economy is booming. During such periods, consumer confidence is high and the demand for various goods and services are correspondingly elevated. In order to meet this surge in demand, manufactures and other types of companies hire more employees.
The opposite is true in the case of a deflation, which also shows the relationship between GDP and unemployment rates. When there is a dip in the GDP caused by a decrease in consumer confidence and a corresponding reduction in demand, companies must adjust to this low demand. Part of the adjustment process includes the shedding of workers who may have become redundant in the face of sluggish demand by consumers.
At times like this, companies look for ways of conserving money since they are no longer making as much money as they used too. One of the cost-cutting measures includes mass sacking of employees whose salaries the companies can no longer sustain. Signs like this are indicators to economists that the demand for goods and services have dropped and that the GDP level is also on a downward slope.