The Unemployment Rate is a measure or indicator in understanding the situation in the labor market, particularly to measure the percentage of unemployment. Learn more below!

What is the Unemployment Rate?

The Unemployment Rate is the most commonly used indicator to understand the conditions in the labor market. The labor market is a term used by economists when discussing the supply of labor (from households) and the demand for labor (by businesses and other organizations). The unemployment rate can also provide insights into the overall performance of the economy, making it an important factor in considering monetary policy.

Employment levels are sensitive to the economic cycle, but in the long term, they are significantly influenced by higher education, government policies, income support policies, and policies that facilitate employment for women and disadvantaged groups. Employed individuals are those aged 15 or older who report having worked in a paid job for at least one hour in the previous week or who have a job but were not at work during the reference week.

The working-age population refers to individuals aged 15 to 64. This indicator is seasonally adjusted and measured in thousands of people aged 15 and above. Unemployment refers to working-age individuals who do not have a job, are available for work, and have taken specific steps to look for a job. The uniform application of this definition results in more internationally comparable unemployment rate estimates than those based on national definitions of unemployment.

This indicator is measured as the number of unemployed individuals as a percentage of the labor force and is seasonally adjusted. The labor force is defined as the total number of unemployed individuals plus those who are employed. The data is based on the labor force survey (LFS). For European Union countries where monthly LFS data is not available, monthly unemployment figures are estimated by Eurostat.

The Impact of the Unemployment Rate on a Country's Economy

The Unemployment Rate is a key way to measure the state of the economy. The unemployment rate is a "lagging indicator," meaning it continues to rise even after the economy improves. It takes some time to begin falling, and even longer to recover after economic shifts. Therefore, it confirms what other indicators have already shown. According to the U.S. Bureau of Labor Statistics (BLS), when workers are unemployed, their families lose wages, and the country as a whole loses their contribution to the economy. When this happens:
  1. The slowdown in economic development due to a decrease in demand for both domestic and imported products
  2. The loss of individual income, leading to a poor standard of living
  3. A decrease in government revenue and low levels of investment
  4. Reducing individual spending and consumption
  5. Increasing government spending and borrowing.
As a result, this may prompt the central bank to cut interest rates to encourage cheap loans in order to boost spending and consumption in the economy.

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How Important is the Unemployment Rate Data for Forex Traders

The unemployment rate affects Forex because it reflects the value of a currency. After the news release, if the rate is higher than expected, it signals a weak economy due to the increasing number of unemployed individuals in that economy. It is also an important tool, following the NFP (Non-Farm Payroll), that most traders pay attention to when making trading decisions. When the unemployment rate is lower than expected, it indicates a reduction in the number of unemployed people in a country's economy.

This is a positive indication for future economic growth. On the other hand, when the unemployment rate is higher than expected, it signals an increase in the number of unemployed individuals in the country. This reflects signs of a weak economy.

How Does the Unemployment Rate Affect Forex?

The unemployment rate is relevant to a country’s upcoming economic changes. Below, we look at three common cases of how this economic indicator affects currencies.
1. When Unemployment Is Higher Than Expected :
When a country's unemployment rate becomes too high, the government tries to stimulate the economy by creating jobs. One example is the U.S. Federal Reserve, which will lower interest rates and expand its monetary policy. If that fails, the next step is to use fiscal measures, public recruitment, or applying for unemployment benefits. Thus, a rising unemployment rate is negative for a country's currency and often triggers bearish trends.
2. When Unemployment Is Lower Than Expected
It signals more spending on consumption as more individuals earn income. That fact can bring inflationary pressures, and interest rates can rise. Unlike high rates, a decline in unemployment is beneficial for a country and its currency, creating bullish pressure for the currency. For example, Japan saw its unemployment rate fall to 2.4% during early 2018, and USD/JPY slipped after the JPY rose 0.22%.
3. When Unemployment Is Below the Natural Rate Level 
Unemployment cannot be sustained below the "natural rate" for too long, as it will trigger inflation and lead to an increase in federal fund rates, resulting in moderate growth. However, the "natural rate" of unemployment has recently been the subject of much debate regarding its accuracy, although it has traditionally been estimated at 5.5%. That’s an explanation of the Unemployment Rate. You can also read other GIC articles to gain more knowledge, such as the explanation of Right Issue, only in the GIC Journal. Be sure to download the GIC Mobile Apps on Google Play Store and Apple App Store. Don't forget to register for trading at GIC to start owning digital assets.