Why Structural Unemployment Is Important In Forex Analysis

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?)

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