page_title: Transformation in economics
section_title: Okun's law
hierarchical_section_title: Transformation in economics / Okun's law
caption_attribution_description: English: Fig. 4. Labor participation
context_page_description: Transformation in economics refers to a long-term change in dominant economic activity in terms of prevailing relative engagement or employment of able individuals.
  Human economic systems undergo a number of deviations and departures from the "normal" state, trend or development. Among them are Disturbance, Perturbation, Deformation, Transformation and Renewal.
  Transformation is a unidirectional and irreversible change in dominant human economic activity. Such change is driven by slower or faster continuous improvement in sector productivity growth rate. Productivity growth itself is fueled by advances in technology, inflow of useful innovations, accumulated practical knowledge and experience, levels of education, viability of institutions, quality of decision making and organized human effort. Individual sector transformations are the outcomes of human socio-economic evolution.
  Human economic activity has so far undergone at least two fundamental transformations, as the leading sector has changed:
  From nomadic hunting and gathering to agriculture
  From agriculture to industry (I)
  Beyond industry there is no clear pattern now.
context_section_description: In economics, Okun's law (named after Arthur Melvin Okun), is an empirically observed relationship relating unemployment to losses in a country's production. This correlation "law" states that a 2% decline in output (GDP) will be accompanied by a 1% rise in unemployment. It has been dubbed as “Macroeconomic Mystery”. After holding for the past 40 years, it faltered during current “recovery”. Unemployment shot up faster than predicted, but then it fell more quickly than indicated by slow U.S. growth in 2009–2013. Output grew 2% but unemployment is 7.6% instead of 8.8% expected by this “law”.
  The notion of transformation explains this artificial mystery. First, unemployment shot up faster because there are no major sectors absorbing and replacing the loss of jobs. Second, unemployment also falls faster because, due to the long duration of the crisis, the workforce participation rate keeps shrinking (In 2007, 66% were working or seeking job, in 2013 only 63.2%), as can be seen in Fig. 4. In other words, people leaving the workforce are not counted among the unemployed. For example, in summer 2013, on average only 148,000 new jobs per month were created, yet unemployment rate dropped steeply to 7.3%, at the cost of 312,000 people dropping out of the work force. The number of unemployed (i.e. actively seeking jobs) is different from the number of people without work – another sign of fundamental transformation and not just a “crisis”.
  The correlation between growth and employment is very tenuous during ongoing transformation. Based on productivity growth rates, GDP could accelerate and yet jobs drop precipitously, due to automation, robotization, digitization and self-service of the transformation era. Also, correlations in economics are always dangerous because they do not prove or establish causal relationships.
caption: Fig. 4. Labor participation
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