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

What Is Unemployment Rate

The Unemployment Rate is the most commonly used indicator to understand conditions in the labor market. The labor market is a term used by economists when talking about labor supply (from households) and labor demand (by businesses and other organizations). The unemployment rate can also provide insight into how the economy is performing more generally, making it an important factor in thinking about monetary policy. Employment rates are sensitive to economic cycles, but in the long run they are significantly influenced by government higher education and income support policies and by policies that facilitate the employment of women and disadvantaged groups.  Working people are those who are 15 years of age or older who report that they have worked in a lucrative job for at least one hour in the previous week or who have a job but did not come to work during the reference week. Working age population refers to people aged 15 to 64 years. This indicator is seasonally adjusted and measured in thousands of people aged 15 years and older. The unemployed are working-age residents who do not have a job, are available to work, and have taken specific steps to find work. The uniform application of this definition results in an estimate of the unemployment rate that is more internationally comparable than the estimate based on the national definition of unemployment.  This indicator is measured in the number of unemployed as a percentage of the labor force and is adjusted seasonally. The labor force is defined as the total number of unemployed plus those employed. The data is based on the labor force survey (LFS). For EU countries where monthly LFS information is not available, the monthly unemployment rate is estimated by Eurostat.

unemployment rate

The Effect of Unemployment Rate in a Country's Economy

The Unemployment Rate is the main way to measure the state of the economy. The unemployment rate is a "lagging indicator", which means that the rate continues to rise, even after the economy improves. It takes a while to start falling, and a while to bounce back after an economic shift. Therefore, it provides confirmation of what other indicators are already indicating.  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, then:
  1. The slowdown in economic development due to a decline in demand for both domestic products and imports,
  2. Loss of individual income resulting in poor living standards
  3. Declining government revenues and low investment.
  4. Reduce individual spending and consumption
  5. Increasing government spending and borrowing
As a result, this may ask the central bank to cut interest rates to encourage cheap borrowing to increase spending and consumption in the economy.

Aussie Slumps After Labor Data & RBA Statement

How Important Is 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 more than expected, it indicates a weak economy due to the rising number of unemployed in that economy. It is also an important tool after NFP that most traders always pay attention to to make trading decisions. When the unemployment rate is less than expected, it indicates a reduction in the number of unemployed people in a country's economy. This is a good indication for future economic growth. On the other hand, when the unemployment rate is more than expected, it is an indication of an increase in the number of unemployed people in the country. This illustrates signs of a weak economy.  

How Does the Unemployment Rate Affect Forex? 

The unemployment rate is relevant to the upcoming economic changes of a country. Below, we look at three common cases of how these economic indicators affect 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 US Fed, which will lower interest rates and expand its monetary policy. If that fails, the next step is to use fiscal measures, public hiring, or apply for unemployment benefits. Thus, rising unemployment rates are negative for a country's currency and often trigger bearish changes.
2. When Unemployment Is Lower Than Expected 
It signifies more spending on consumption because more individuals are earning. That fact could bring inflationary pressures, and interest rates could rise. Unlike high rates, a decrease in the unemployment rate is beneficial to a country and its currency, creating bullish pressure for the currency. For example, Japan saw the unemployment rate drop to 2.4% during early 2018, and USD/JPY slipped after the value of the JPY rose 0.22%.
3. When Unemployment Is Below Natural Levels 
Unemployment cannot be kept below the "natural level" for too long, as it will trigger inflation and a rise in the federal funds rate, until moderate growth. However, the "natural rate" of unemployment has been the subject of much debate regarding its accuracy recently, even though it is traditionally estimated at 5.5%.   That's an explanation of the Unemployment Rate, you can also read other GIC articles to get more knowledge, such as the explanation of Right Issue, only in the GIC Journal. Make sure, download GIC Mobile Apps on the Google Play Store as well as the Apple App Store. Don't forget to register for trading on GIC to try to start owning digital assets.