HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Structural unemployment


Why Structural Unemployment Is Important In Forex Analysis


When it comes to interpreting the impact of employment data on the currency markets, conventional wisdom is pretty simple.

Higher unemployment is an indication of economic weakness, thus the currency responds accordingly. Lower unemployment means the economy is growing, and therefore the currency gets stronger.

But, if it were that easy, forex wouldn’t require so much analysis and study.

There are complications, such as when we add central bank action to the analysis. If employment goes up enough, it will indicate an overheating economy and higher inflation. This could lead the central bank to raise interest rates, further strengthening the currency. And vice versa.

The next complication to add is structural unemployment. And with so many economies in the world right now having such low unemployment, it’s an important factor that can be forgotten by traders and analysts used to nearly a decade of relatively high unemployment.

What is Structural Unemployment?


The reality of economics in a free market is that you can’t have zero unemployment. There are always companies closing units, creating redundancies with new processes and technologies. Not to mention bankruptcies, employees looking for better job prospects and people who simply can’t hold down a job.

There will always be, inevitably, a certain amount of unemployment, and that’s what’s called “structural unemployment.”

How much “structural unemployment” is varies depending on circumstances, and between economies.

There is something of a consensus among economists that a generic, advanced economy, will have a structural unemployment level somewhere between 4% and 6%. However, there are clearly exceptions; for example, Switzerland, which rarely has unemployment high enough to be in that range at all.

What the structural level is for any given economy at any given time is a matter of debate. This is a particular complication for the US, given the Fed’s mandate to keep unemployment “low.”  (What exactly is “low”, since not even the members of the Fed can agree on where the structural unemployment level is?)

The academic debate aside, there are some real-world issues that are directly related to forex that concern us a lot more.

Structural Forex


As the unemployment rate lowers to a structural level, it causes particular issues in the economy. It becomes increasingly harder for businesses to find good employees (a condition called “labor tightness”), which means they have to start raising wages without increasing production.

This directly leads to inflation and a depreciation of the value of the currency. However, it raises the cost of exports since labor costs are increasing.

If unemployment falls below the structural level, it might be that businesses simply cannot hire people to do work, because there is just no one available. This means that work goes undone, leading to less economic growth.

Conventional wisdom says that less unemployment is good, but because of structural unemployment, the law of diminishing returns applies.

The closer the economy comes to structural unemployment, the less “benefit” the currency sees from lower unemployment numbers. So much so that a drop in unemployment can be seen as bad for the currency.

If traders make a habit of expecting a bullish response to a good labor figure, they can be caught off guard.

How to Tell if Economies are Near/At Structural Unemployment


Getting a definitive answer is slightly difficult since there isn’t much consensus on the matter. But it’s just a matter of reading the signs and using one’s best judgment.

Is it difficult for businesses to hire new workers? Is there wage inflation? Are exports increasing in price, and dropping in volume? If the answer is yes, then maybe staking out a long position in that currency isn’t a good idea.

Also, we shouldn’t forget that structural unemployment is a harbinger of a correction, if not an outright recession. Another reason for forex traders to prick up their ears when structural unemployment is the talk of the markets!

#source


RELATED

What are defensive stocks and why you should consider them?

The market has fallen sharply this year, and investors have seen losses. Question: Can defensive stocks help hedge against risks? What are their advantages?

Crypto CFDs: A Guide to a Safer Cryptocurrency Trading Approach

The unprecedented rise of cryptocurrencies has grabbed the attention of both novice and seasoned investors. While many venture into direct trading of cryptocurrencies...

Online Cryptocurrency Trading: Features and Advantages

The year 2008 marked the birth of the crypto market. It was in August when the domain bitcoin.org was registered and the description (White Paper) of the cryptocurrency was published...

What is PMAM Software

To start with, a trading platform is a software system that allows people to trade various financial assets. It enables investors to open, liquidate, and manage market positions...

Leveraged ETFs: Worth It or Not?

Leveraged Exchange-Traded Funds or leveraged ETFs aren't new to individuals or institutional investors. In fact, they're becoming one of the most popular types...

Five Tips To Choosing The Right Strategy On Covesting

The Covesting copy trading platform has now been available on PrimeXBT for over a month following an extended beta phase. Between the beta and the ongoing...

Cardano: What Price Will the Peer-Reviewed Crypto Reach?

Cardano was late to the crypto market compared to many others, but the altcoin crypto asset is brimming with innovation, giving it incredible projected...

The Dynamics of Commodity Trading: An In-depth Look

From the very clothes on your back to the coffee you sipped this morning, commodities influence our daily lives. This vast market encompasses a wide variety of goods...

A Guide How to Trade Indices

An index (plural, indices) is a measure of a collection of assets or tradable securities. It aggregates the prices of all the underlying assets and provides...

Top 7 forex trading strategies in 2020

The foreign exchange (forex) market is a global marketplace where the participants exchange one national currency for another. According to Wikipedia...

Trading the FTSE All Share Index

The London Stock Exchange (LSE) is one of the oldest and most important financial institutions in the world, and in case you have heard of the...

How to Trade Commodities Online with the Best CFDs Broker

Trading commodities online is very popular among traders. With the option to trade commodities on the futures market or through derivatives such as Contracts for Difference (CFDs)...

Litecoin Versus Ethereum And Where To Invest

A key difference in the makeup of these two coins is that Ethereum is built to be a platform for applications and other programs to work on - it is known as a decentralised...

What Are Crypto Liquidity Pools?

Liquidity pools are a massive part of DeFi, or decentralized finance, one of the essential parts of the crypto world. By understanding what is possible with the liquidity pool...

Crypto Staking Explained And In-Depth Guide

Crypto staking has become more of a buzzword recently in the industry, however, it isn't exactly a new term when it comes to cryptocurrencies. The recent hype surrounding...

What is the Metaverse? The future of the internet

When Mark Zuckerberg announced that he’s turning Facebook into a metaverse company and changed the company's name to Meta, the metaverse quickly became...

Nasdaq CFD Trading: Everything You Need To know

The Nasdaq composite index is one of the three most important and popular major stock indices traded on the United States stock market. These three crucial indices...

Guide: How To Make Money With Bitcoin In 2021

Bitcoin has been making headlines for over a year, smashing record after record and setting a new all-time high over $60,000. The coin, which rose from virtually worthless...

The Art of Trading Forex With Stop Loss (Or Without It)

One can't overstate the importance of mastering the art of stop loss placement when trading Forex or any other financial market for that matter. Stop loss is an...

How not to fall prey to the Black Swan

The black swan is a sudden unpredictable event with enormous consequences - this is a brief description of this term, which became widespread...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.