Employment is crucial for consumer spending, which makes more than two-thirds of the GDP for many countries. Understanding the employment rate and the cascading effect it has on the economy is paramount for fundamental analysis. The factors affecting the employment rate and business cycle patterns all inherently impact economic growth and currency valuation. Hence, understanding employment as an economic indicator will strengthen our analysis.
What is Employment Rate?
Employment Rate: It is defined as the ratio of employed to the total available labour force. Here the labour force is defined as the sum of employed and unemployed persons. It is also considered as a measure of the extent to which the labour force is being used.
Unemployment is a state where an individual is actively searching for employment but cannot find work.
Unemployment Rate: It is defined as the percentage of unemployed people to the available labour force. It is the other half of the employment rate. Employment and unemployment rate combined should yield results as 100% as it equals the total available labour force.
How can the Employment Rate numbers be used for analysis?
Employment and unemployment can be considered as the two sides of the same coin. We can derive our fundamental conclusions from either direction. Employment Rate is essential for our analysis because it has a direct and cascading impact on consumer spending. In the US, consumer spending accounts for about 70% of the total GDP.
A high employment rate indicates that more people in the labour force have income that they can spend on purchasing goods and services. When consumer spending is on the rise, businesses flourish, leading to better wages, or even more employment. Overall, employment in one sector has an indirect positive effect on dependent sectors and a direct positive effect on the economy.
The Government is also politically committed to ensuring a low unemployment rate; otherwise, citizens will not favour them in the next elections. By providing proper support to local businesses, the Government can increase employment in the short run.
A high unemployment rate is very damaging to the economy. As more people are unemployed, there is a direct negative effect on consumer spending. In this scenario, also the cascading effect works and makes the situation worse. It also hurts the employed people.
Increased unemployment in the economy can bring down the employed morale, making them feel guilty for being employed while their colleagues are unemployed. It can also make employed people feel less secured and discourage their spending habits, and they may end up saving for a rainy day. Employed people may feel lucky enough to have a job that inhibits them from applying for better opportunities amid high unemployment.
Employment and Unemployment rates can also help investors to keep a pulse on the health of the economy. Overall it is essential to make sure the employment rate is always high and does not take a dip. Even when the unemployment rate rises linearly, it has an exponential impact on economic growth, and hence the central authorities try to avoid it at all times.
It is also essential to understand that employment rates are sensitive to business cycles in the short run. Hence, seasonally adjusted versions of the same are more useful for analysis. In the long run, the employment rates are significantly affected by government policies on higher education and income support. Policies that focus on the employment of women and disadvantaged groups also help increase the employment rate.
Both developing and underdeveloped countries’ governments have to focus on education policies and employment opportunities for their labour force if economic growth is the primary concern. Literacy and higher education in underdeveloped and developing nations have helped the economies grow stronger year-on-year.
Employment rates are coincident indicators and can also be used to predict or confirm oncoming recessionary or recovery periods, if any. The onset of a recession is accompanied by a massive unemployment rate or decreased employment rates. Hence, despite the propaganda of the media and Government, we can use employment data actually to confirm whether the economy is growing or stagnating. Accordingly, during recovery periods, employment rates start on a recovery trajectory back to its previous normal.
Impact on Currency
As an increase in employment rate points towards a growing economy, a high employment rate is good for the GDP and the currency. Hence, the employment rate is a proportional coincident indicator. An increase or decrease in employment rate is suggestive of improving or deteriorating the economy, respectively.
The forex market watches the unemployment rate more closely than the employment rate itself. Significant changes in the employment rate or the unemployment rate tend to have a considerable impact on market volatility. Still, generally employment rate in itself is a low impact indicator compared to the unemployment rate.
Employment change, initial jobless claims also precede unemployment rates, and the desired effects are already factored into the market before the employment rates are released. Hence, overall it is a low impact indicator.
In the United States, the BLS surveys and tracks monthly employment and unemployment within the country. It classifies them based on geography, sex, race, industry, etc. The Employment Situation report is also published by the BLS, and it goes as far back as the 1940s. It is released by BLS on the first Friday at 8:30 AM Eastern Standard Time every month.
Sources of Employment Rate
The US BLS publishes monthly employment and unemployment reports on its official website. We can also find the same indexes and statistics of various categories on the St. Louis FRED. We can also find employment rate statistics published by the OECD countries here. Consolidated reports of employment rates of most countries can also be found in Trading Economics.
How Employment Rate News Release Affects The Price Charts
As we have already established, an increase or decrease in the employment rate can be used to gauge whether the economy is performing well or poorly. For forex traders, it is therefore imperative to understand how the news release of this macroeconomic indicator will impact the price action on various currency pairs.
In the US, employment reports are released monthly, usually on the first Friday after the month ends. The latest, expected, and all historical figures are published on the Forex Factory website. We can find the most recent release here. Below is a screengrab of the US unemployment rate from the Forex Factory website. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.
As shown, the unemployment rate is a high impact indicator. The snapshot below shows the change in the US unemployment rate as released on August 7, 2020, at 1230GMT. For July 2020, the unemployment rate declined from 11.1% to 10.2%, beating the 10.5% decline forecasted by analysts.
Now, let’s see how this news release made an impact on the Forex price charts.
EUR/USD: Before Employment Data Release August 7, 2020, Just Before 1230GMT
The 30-minute EUR/USD chart above shows the market is on a downtrend from 0200 to 1200 GMT with the candles forming below the 20-period Moving Average. More so, the market was trading within a narrow price channel of between 1.1850 and 1.1810, indicating a calm market with traders waiting for the latest employment data to gauge the economic recovery.
EUR/USD: After Employment Data Release August 7, 2020, 1230GMT
As can be shown on the chart above, immediately after the news release, we can observe a sudden downward spike with a retraction. This spike indicates the market is having mixed reactions to the positive employment news hence the strong USD.
After the initial spike, the market can be seen to ‘absorb’ the positive news. The pair adopted a bearish outlook with the price breaking and staying below the earlier observed 1.1810 resistance level.
Since the pair had not shown any unexpected sudden swings before and after the new release, trading the news would have been profitable. For such a high impact economic indicator, it is advisable to open positions after the news release to avoid being caught on the losing end of the trend.
Now, let’s quickly see how this new release has impacted some of the other major Forex currency pairs.
GBP/USD: Before Employment Data Release August 7, 2020, Just Before 1230GMT
GBP/USD: After Employment Data Release August 7, 2020, 1230GMT
The GBP/USD pair showed a similar trend as the one observed with EUR/USD. The pair can be seen to have traded within a narrow price channel of 1.3122 and 1.3071 from 0700 to 1200 GMT. After the economic data release, the pair similarly had a sudden spike. It later adopted the same bullish stand as the EUR/USD pair, with price breaking and trading below the observed resistance level.
AUD/USD: Before Employment Data Release August 7, 2020, Just Before 1230GMT
GBP/USD: After Employment Data Release August 7, 2020, 1230GMT
Similar to the EUR/USD and the GBP/USD pairs, the AUD/USD traded within a price channel of 0.7221 and 0.7196 and no unexpected spikes before the news release. After the news release, a sudden spike can be observed with an accompanying retraction, and later the pair adopted a bullish stance breaking below the observed resistance level.
From the above analysis, the subdued market volatility before the release of the employment data and the subsequent volatility, it is evident that the employment rate is high impact indicator anticipated by forex traders.