Okun

Like ricardian ambivalence I have wondered about Australia's fairly resilient unemployment rate given the anemic GDP growth it experienced after the GFC. The average annual through the year (TTY) GDP growth to 2008 was 3.7 per cent per year. From 2010 it has been 2.3 per cent.

Using Okun's rule, I had expected the unemployment rate to continue growing by about half a percentage point each year over 2010 and 2011.

However, notwithstanding the small bump in the unemployment rate in mid 2011, the trend from early 2010 to early 2012 has been flat to downwards (by around 0.3 percentage points) Not upwards and not quite what Okun's rule predicted.

My solution to the problem was to question the linear regression. A localised regression yields a prediction closer to the experienced near zero growth in the unemployment rate we have seen from 2010.