Unemployment Rate

Unemployment Rate

Unemployment Rate

Unemployment Rate & trading

As the world globalises and technologies infuse into our work life, the fields of employment are changing. Everybody is looking to acquire the best positions in the best companies, regardless of the location, which creates a global-scale competition in the jobs market.

To top it all, political, social, and environmental changes shift the economies from one condition to another. Although it all sounds like chaos, this the new truth of what we call the global economy. The businesses try to adapt; those who succeed enlarge their workforce and those who fail evacuate it. As a result, rapid fluctuations in the unemployment rates became the new go-to source when assessing economic growth.

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What is the Unemployment Rate?

The Unemployment Rate is the percentage of the unemployed in the total workforce of a country. The total workforce is comprised of three categories: payroll- or contract-based employeesself-employed, and unemployed. People who are not employed but also ineligible to work (e.g., children and elders) are excluded from the workforce count. Thus, the national unemployment rate shows the proportion of the number of unemployed people to the total number of people who can work.

The Unemployment Rate report is the main economic indicator to identify the unemployment trends. As a lagging economic indicator, it monitors the past performance of the labour market and measures the number of unemployed people by deducting the people who found a job and adding the people who recently started to look for work. Comparing the rates of the focused and the previous periods, we can gauge if more or less people are seeking support from the state and infer whether the unemployment is on an uptrend or a downtrend.

Unemployment trends are strongly correlated with the confidence of businesses towards the national economy. In an expanding economy, high business activity would boost the companies’ confidence and encourage them to scale their operations by employing more people. On the other hand, if the economy is stagnant or unstable, they would aim to maintain their current operation level and refrain from making new investments into their business. In times of crisis like devaluation or pandemics, however, the main purpose would be to ensure the survival of the company and job cuts would increase.

How to Calculate the Unemployment Rate?

The definition and inclusion criteria of the unemployed and the total workforce can vary according to the country. Therefore, each country’s unemployment rate report is slightly different than others. In some countries, the unemployed include only the people who are actively receiving jobless benefits, while in others, it refers to anybody in the eligible workforce who aren’t actively reporting income. Likewise, the definition of total workforce may or may not count in part-time workers, temporary workers, or self-employed people.

For example, in the U.S., there are 6 different unemployment reports, ranging from the least inclusive U-1 to most inclusive U-6. Each report and each one includes or excludes one or more of the details outlined above. The unemployment rate calculations are seasonally adjusted to account for the repeating uptrends during holiday seasons and downtrends following them.

The official U.S. unemployment rate, U-3, defines the unemployed group as the people who have been actively looking for work in the past four weeks and includes full-time, part-time, and temporary employees in the total workforce. The formula is as follows:

U-3 = [(Unemployed) / (Total Workforce)] x 100

Note that, in U-3, people who are into their 5th week of job search are excluded. This group is considered as discouraged from looking for a job due to an unsuccessful search. The reasons for discouragement can range anywhere from age or race biases to being under- or overqualified. This group is calculated as a part of the unemployed group and total workforce in U-4 measurement.

U-4 = [(Unemployed + Discouraged) / (Total Workforce + Discouraged)] x 100

Although the variance of methods between and within each country drew many criticisms to the reliability of unemployment rate reports, they deliver mostly the same information. In order to create a global standard, OECD introduced several types of unemployment rate reports taking U-3 as a basis:

  • Unemployment Rate: standardised U.S. formula, active job seekers of the past four weeks are considered as unemployed. Harmonised Unemployment Rate (HUR): active job seekers, without time restrictions, are considered as unemployed.
  • Unemployment Rates by Education Level: focuses on ages between 25 and 64 and categorises according to education level (below upper secondary, upper secondary non-tertiary, or tertiary).
  • Long-term Unemployment Rate: calculates the percentage of people who are unemployed for more than 12 months within all unemployed population.
  • Youth Unemployment Rate: focuses on active job seekers in ages between 15 and 24.

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The Unemployment Rate as an Economic Indicator

Since the performance of the labour market is based on the interaction of business confidence and economic conditions, the Unemployment Rate is followed closely by the government and the central bank. It helps to understand how the changes in the economic conditions are affecting business practices and adjust the economic policy accordingly.

High unemployment rate means that a significant portion of the population is living without a stable income. The consumption tendencies of the unemployed are naturally limited to satisfying basic needs, and their absence in the larger economy shrinks the general demand. With supply surplus, local product prices would be pressured lower and decrease the national Gross Domestic Product (GDP).

When the unemployment rate remains high for too long, it can start a cascade of economic slowdown. As the national purchasing power weakens, the businesses would have to lay off more employees to balance the falling revenues and stay afloat. In turn, more people would apply for unemployment benefits and create a large burden on the state budget to support citizens.

Low unemployment rate, on the other hand, would mean that many citizens are enjoying financial security. They are able to participate in the consumption economy beyond their basic needs and create demand. As a result, the increasing demand adds momentum to the domestic economic activity, enhancing the extrinsic value of the local products and increasing the GDP.

Sustaining low rates of unemployment is also considered as disadvantageous. Rising purchasing power eventually skews the supply/demand ratio heavily towards demand and causes inflation. As the local prices rise, the employees will ask salary adjustments to maintain their living standards. Businesses will become less profitable and lack resources to continue growing, which would stagnate the economy.

Optimum unemployment rate for a healthy economic expansion is between 3.5% and 4.5%. If the unemployment rate is significantly higher than the country’s target, the central bank can cut the interest rates to cheapen bank loans for businesses and encourage them to employ more people. Similarly, inflation due to a significantly lower unemployment rate can be mitigated through an interest rate hike by the central bank. The market demand would be contracted, and the local prices would decrease, thereby reducing the demand for higher salaries.

How to Trade with the Unemployment Rate Reports?

As an important indicator of economic growth and future economic policy decisions, news trading strategies often consider the unemployment Rate report as a market-mover. An uptrend in the unemployment rate can cause the central bank to consider an interest rate cut to stimulate the weakening economy. On the other hand, if unemployment is decreasing, the central bank can raise the interest rates to control the inflation and add value to the currency.

The unemployment rate reports are usually followed by high volatility in the currency markets. The expectation of a prediction for interest rates builds up and breaks out in the post-report hours with multiple high risk and high return opportunities. For instance, the U.S. publishes its Unemployment Rate data together with Nonfarm Payrolls (NFP) on the first Friday of each month. The markets anticipate this moment eagerly and get ready to trade USD and American assets.

Let’s say that the Coronavirus lockdown in the U.S. caused many people to lose their jobs, and the unemployment rate spiked 2% in one month. Now, we are in the recovery period, and the American economy is going to be reopened, giving back the people their jobs. We check the economic calendar and see that the previous result was 7.8%, and analysts forecast this month’s outcome to be 7.1%.

Checking EUR/USD and GBP/USD charts, we see both are falling. So, the expectations improved the market sentiment and encouraged the traders to buy USD. When the report is published, the actual result is 6.5% – meaning a strong fall in the unemployment rate. The market reacts quickly, and USD gains value across the markets.

Key Unemployment Rate Reports Around the World

Due to its impact on financial markets, the unemployment rate indicator is closely monitored worldwide. Below you will find more information about the release of key unemployment rates:

USA

EU

  • Region: Europe
  • Date of release: Monthly
  • Issuing Agency: Eurostat
  • Affected Assets: EUR; EuroStoxx50; DAX 30, CAC 40; government bonds of EU-members

UK

  • Region: Europe
  • Date of release: Monthly
  • Issuing Agency: National Statistics
  • Affected Assets: GBP, EUR; British stocks; FTSE 100; UK Gilts

Canada

  • Region: North America
  • Date of release: Monthly
  • Issuing Agency: Statistics Canada
  • Affected AssetsCAD; Canadian stocks; S&P/TSX; Canada Marketable Bonds; Crude Oil

Japan

  • Region: Asia
  • Date of release: Monthly
  • Issuing Agency: The Statistics Bureau of Japan
  • Affected Assets: JPY; Japanese stocks; Nikkei 225; Japan government bonds

China

  • Region: Asia
  • Date of release: Monthly
  • Issuing Agency: National Bureau of Statistics
  • Affected Assets: CNY, AUD, NZD; Chinese stocks; China A50; Chinese Government Bonds

Australia

  • Region: Oceania, Asia
  • Date of release: Monthly
  • Issuing Agency: Australian Bureau of Statistics
  • Affected Assets: AUD, NZD; Australian and New Zealand stocks and bonds; ASX 200 index

Why Trade Unemployment Rate Releases with AvaTrade?

The releases of the Unemployment Rate report is often accompanied by large scale volatility in the markets and generate numerous trading opportunities for Forex traders. Considering the number of unemployment reports published each month, taking advantage of the tools and assets AvaTrade has to offer can boost the portfolio quickly.

  • When is the next Unemployment Rate release? AvaTrade economic calendar lists all the key unemployment rates; check now and see what the forecast for the next unemployment rate is.
  • What should I trade with the Unemployment Rate? As a predictor of interest rates, the report has a strong impact on the national currency of the country; you can both buy and sell with currency pair CFDs in AvaTrade.
  • How can I learn more? Check our comprehensive education section to learn more about different trading strategies and read about the U.S. Dollar in the Forex Trading section.
  • What about the risks? AvaProtect risk management tool was designed to simplify the risk management process by allowing you to hedge a position at the same time you open it.

The Unemployment Rate reports are most useful when there are economic troubles around the world. Taking into account the variables which affect the unemployment rate, a thorough analysis can help predict whether unemployment is on an uptrend or downtrend. Start trading today!

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