Unemployment
When the economy produces more than its potential, firms hire, and when it produces less, they lay people off. This page covers equation E6.
In plain words
Every country has its equilibrium unemployment, the rate it has when it produces exactly its potential. Unemployment drops below it when the economy is running above its potential, and rises above it when the economy is running below, but it follows only with a delay and covers half the distance to its new target in about three months (E6).
In the game
Unemployment is published every month on the dashboard, and it weighs on popularity, which loses 0.6 points for each extra point of unemployment since the government took office (E12). No order sets it. It follows activity, so that in France, raising spending by two points lowers it by 0.50 points after one year (§7.3).
The basics
The unemployment rate is the share of people who are looking for a job without finding one, out of all those who work or want to work.
It is never zero, even when everything is going well, because there are always people between two jobs and trades that are hiring but cannot find anyone. The level where it settles when the economy runs at its normal pace is called equilibrium unemployment. Each country has its own, which depends on its labour market. In the game, it stays the same throughout and no reform by the player moves it. The studio knows this is a simplification, because in the data, unemployment that lasts ends up raising equilibrium unemployment itself.
When activity speeds up, firms hire and unemployment falls below this level, while it rises above it when activity slows. The economist Arthur Okun measured this relationship in the 1960s, hence its name, Okun's law. It is not equally strong everywhere. In Spain, unemployment reacts strongly to activity, whereas in Japan it barely moves.
E6. Okun's law
In plain words
Unemployment heads towards a target, which equals the country's equilibrium unemployment minus a fraction of the output gap. This fraction is called the Okun coefficient. It is 0.39 in an advanced country, but the model takes the country's own value when a study publishes one. Unemployment does not follow overnight but covers half the distance to its target in 97 days, or about three months.
Unemployment never falls below 0.1%, the lowest rate ever measured. The studio has set this floor because the law is measured in countries where equilibrium unemployment is several points, and applying it to Qatar, where it is only 0.5%, would push unemployment below zero.
Take France, with equilibrium unemployment of 7.5% and an Okun coefficient of 0.315. If the economy is running 2% above its potential, the unemployment target becomes 7.5 − 0.315 × 2 = 6.87%. The same overheating would bring the target down to 5.63% in Spain, where the coefficient is 0.934.
In the formula:
| Symbol | What it is | France |
|---|---|---|
| \(u\) | today's unemployment | |
| \(u^{**}\) | the country's equilibrium unemployment | 7.5% |
| \(u^{*}\) | today's target | 6.87% |
| \(\beta\) | the Okun coefficient | 0.315 |
| \(\tilde y\) | the output gap (E1) | +2 |
| \(u_{\min}\) | the floor | 0.1% |
| \(s_u\) | the share of the gap closed each day |
Show the full formula and its sourcesThe exact form at the daily step, every parameter with its source, and what the equation leaves out.
| Parameter | Value | Status | Source |
|---|---|---|---|
okun_coefficient β | 0.39 / 0.20 / 0.17; per country when the study publishes it | Ball, Furceri, Leigh and Loungani 2019, figure 1: 0.39 (29 advanced), 0.20 (42 developing). Low-income: no country in their sample; An, Bluedorn and Ciminelli 2021: 0.17 for 57 emerging and developing countries | |
| values per country | 25 countries, from 0.015 (China) to 0.934 (Spain) | Ball et al. 2019, table 1, 1980-2015: France 0.315, United States 0.518, Germany 0.370, Japan 0.171, United Kingdom 0.417, Italy 0.334, Canada 0.440, Brazil 0.241, Mexico 0.190, Poland 0.667, Turkey 0.100… (full list: parameters.COUNTRIES). China and Indonesia are not significant: their measured unemployment barely follows the cycle | |
unemployment_persistence | 0.52 per quarter | exponential kernel fitted to the US lags of Ball, Leigh and Loungani 2017 (−0.251, −0.133, −0.122, i.e. 50, 26 and 24%): decay of 0.50 to 0.53 per quarter (half-life: 97 days) | |
unemployment_floor u_min | 0.1% | the lowest rate ever measured (Qatar, 0.10%, World Bank, ILO data) |
Why. When output exceeds its potential, firms hire. The coefficient is smaller in developing countries, where people move from formal to informal work rather than into unemployment (An et al. 2021). The floor: the law is estimated in countries where equilibrium unemployment is several points; applied to Qatar (0.5%), it would push unemployment below zero. What it simplifies: no hysteresis (lasting unemployment does not raise equilibrium unemployment; Ball and Onken 2021 measure this hysteresis, §9).