HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

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

Digital currencies as financial instruments

Digital currencies are computer files that are stored in distributed databases that communicate over the internet. They can only be accessed or used through...

How to Strategically Short Bonds

Bonds, traditionally seen as stable income-generating securities, have evolved in today's dynamic investment landscape. Their prices, influenced by an array of market determinants...

What are Expert Advisors?

Expert Advisors (EAs) are automated programs that run on the MetaTrader 4 (MT4) or MetaTrader 5 (MT5) trading platforms. They are algorithms that can be used...

Secure your cryptocurrency: Storage options and best practices

Every cryptocurrency owner needs a place to store his assets, and the storage method of choice needs to be as secure as possible. While there are many options available when it comes to storage...

A concise guide on investing in Ripple CFDs

Before the advent of digital currencies, man has been using paper or fiat currencies which are controlled by governments or central banks, restricted by location...

Automated Crypto Trading: The Ultimate Guide

Cryptocurrency trading first started in the beginning of the 2010s and has been actively growing in popularity ever since. Currently, the crypto market has thousands...

All About Cardano: A Crash Course

Cardano has been one of the best attempts to solve two problems that BTC fails to achieve: scalability and network scalability. But are good intentions...

Taking Advantage on A Bearish Market

Shorting a stock has been popular and widely accepted investment strategy in past years. It had become increasingly globally known when...

Different ways of investing in gold in these modern times

Gold is a bright, yellow, malleable and ductile metal found in nature. It is usually found in rock veins, gold nuggets, grains, electrum or alluvial gold...

Solana vs. Ethereum: Which one is the Better Investment?

Understanding the difference between Solana and Ethereum can give you an insight into how to invest in both. When debating Solana vs. Ethereum, you should understand...

What is Decentralized Finance, or DeFi?

Decentralized finance, or DeFi, is similar to but not identical to Bitcoin (BTC). The term "DeFi" refers to financial systems enabled by decentralized blockchain technology. DeFi is mostly linked to the Ethereum (ETH) blockchain...

What Made Bitcoin's Last Bull Market Different?

Bitcoin has experienced multiple bull markets, and this latest one, which began in 2018, is markedly different from the last. Between late 2018 and the time of this writing...

Common Knowledge is a Trading Trap

It is no secret that trading can be just as risky as it can be profitable. Many amateur traders dive into it without a proper plan or strategy in place, which costs them lots of money. But an even bigger mistake they can make...

All you need to know about how to trade cryptocurrency

Cryptocurrencies have received devotion from millions of investors across the globe due to cryptography and transparency of transactions. They have started...

How to Get into Online Metal Trading?

The most popular precious metals in metals trading are gold and silver. The latter is strongly linked to the main currencies and the world economy as a whole. Precious metals...

Speculating with CFDs

Typically short-term, speculative trades are generally coupled to major market events such as central bank interest-rate decisions and company results.

Achieve your trading goals with short-term investments

No trader enters global markets without a goal. The goal for many investors is the same: they are willing to catch trading opportunities. Yet each trader...

Living Through Economic Crisis: Top Hedging Instruments in 2022

There has been absolutely no doubt that the post-pandemic global economy will be recovering at a turtle pace. But instead of a gradual recovery, the economy has plunged into a rapidly...

Top Tech Trends of the Future for Trading

Tech development impacts our daily lives as well as traders’ profits. Technologies change rapidly, creating new opportunities in everyday routine and the stock market...

What Markets Hold For 2023 And What Assets To Invest In?

As some people like to say, we are always faced with great opportunities carefully disguised as insurmountable problems. And most of us kept repeating this to ourselves many times in 2022...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
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.