Remember Okun’s Law?

Formulated in 1962 by the late Arthur M. Okun, a Yale economist, it was for many years a reliable description of what happened to employment, productivity, hours worked and a few other variables when economic output rose or fell. In its most famous formulation, Okun’s Law held that for every 3 percent increase in economic output – above the long-term average growth rate – the unemployment rate fell by one percentage point. And vice versa in hard times.

The various relationships held up pretty well in the early decades after World War II, when Mr. Okun, who served in the Kennedy administration, was doing his work. The powerful American economy was a predictable animal, and Okun’s Law seemed to reflect its steady workings even into the 1990s.

But the economy ain’t what it used to be, and neither is Okun’s Law.

Inflation-adjusted gross domestic product, for example, fell by 2.4 percent in 2009. Now consider that the long-term tendency of the economy is to grow at an annual rate of 2.5 percent. That means that the decline last year was 4.9 percent below normal performance. So, according to Okun’s Law, the unemployment should have gone from 7.4 percent at the start of the year to 9 percent a year later. Instead it was 10 percent in December, and not much lower in January.

So Okun’s Law, a pillar of mainstream economics, is no longer reliable, as Robert Gordon, a Northwestern University economist, explains in a recent paper.

For starters, in a modern recessionary economy employers are quicker to shed workers and cut back hours than Mr. Okun had imagined, and more likely in an upturn to rely on productivity — squeezing more work from existing employees — than to hire new people to meet rising demand.

“Productivity growth was actually above trend during most of the recession,” Mr. Gordon wrote.

In addition, corporate managers may have more leverage over labor today than they had in Mr. Okun’s day.

“Seeing their compensation collapse with profits and the stock market,” Mr. Gordon wrote, managers “cut costs relentlessly.” In doing so, they rely on rising productivity to sustain production even as they usher workers out the door, now that employers are relatively less constrained by the union power that helped both to protect workers in Mr. Okun’s day, and to make employers’ behavior more predictable.

Okun’s Law plainly needs a rewrite, and Mr. Gordon offers a rough draft. He argues, in effect, that if Okun were living today, the job loss factor in his famous formula would be almost twice as great as it was in the 1960s.

“Labor has always been the prime victim of recessions,” Mr. Gordon said, “but now business firms have succeeded in pushing more of the pain onto workers than ever before.”