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employment

Employment: The Primary Engine of Economic Growth and Prosperity

EMPLOYMENT: WHAT IS IT?

It is a major economic engine and a vital indicator of economic expansion. According to the International Labor Organization, “people of working age who are without work, available for work, and actively seeking job” are considered unemployed. As a result, those who are employed are those who hold down jobs, while those who do not but are actively seeking jobs are considered unemployed. Although not perfect, the unemployment rate is a crucial consideration when doing fundamental analysis and is comparable to the fundamental economic concept of supply and demand.

Because changes in labor supply and demand directly affect economic growth and consumer spending, policymakers often see unemployment, the GDP, and inflation as interconnected and part of their primary macroeconomic goals. The publication of data, including employment statistics, is one of the most significant events on the economic calendar. Both central banks and market investors pay great attention to these announcements.

The central bank calendar allows FX traders to keep up with news from the central bank.

UNEMPLOYMENT’S IMPACT ON THE ECONOMY

The Federal Reserve Bank (“The Fed”) in the US uses employment statistics to determine when it may be time to modify monetary policy. For instance, if the unemployment rate in the US is high, the central bank may try to stimulate the economy via expansionary monetary policy, which often involves cutting interest rates. Since rates (opportunity costs) are now lower, investing in growth may become even more appealing.

The graphic below illustrates how an expansionary monetary policy affects economic output:

EMPLOYMENT
Source: DailyFX

EMPLOYMENT TO INFLATION

On the other hand, a tighter monetary policy or higher rates are only sometimes necessary when there are high employment and low unemployment rates. When inflation plays a role in that equation, there is another thing to be concerned about.

Businesses will have a more challenging difficulty hiring when the unemployment rate declines. This should result in competition for those employees, which often manifests itself in increased salaries, referred to as inflation.

The need to safeguard the financial system from capital loss caused by negative real rates and runaway inflation often drives central bankers to raise rates and tighten policy.

In terms of “Average Hourly Earnings (AHE),” this is often monitored in the US via the Nonfarm Payrolls report.

NONFARM PAYROLLS EMPLOYMENT REPORTS

One of the most important economic announcements in the US is the Nonfarm Payroll (NFP) report, which is issued by the Bureau of Labor Statistics on the first Friday of every month at 8:00 EST and is seen as a clear indicator of US economic expansion. Due to its early publication, which emphasizes data for the most recent completed month, NFP is closely watched since it’s often one of the first indicators that market players have for that period. The unincorporated self-employed, unpaid volunteers or family employees, agricultural laborers, and domestic workers are all omitted from NFP. Because of the report’s preliminary nature, modifications are often made in subsequent months.

EMPLOYMENT

The U.S. Current Employment Statistics (CES) program, which polls over 141,000 employers and government entities, provided the data for the NFP report. To provide precise industry statistics on employment, hours, and incomes of employees on nonfarm payrolls, which account for 80% of the US workforce, this represents over 486,000 unique work sites. The NFP report includes information on workers in the manufacturing, construction, and commodities sectors. This data is even more important since it sets the tone for markets under the careful eye of the Federal Reserve because it is released at the beginning of the month with the US unemployment rate and Average Hourly Earnings (AHE).

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