Forex Basics | Fundamental Analysis

Unemployment and Currency Strength

Unemployment can be defined as the state of being without a reliable source of income. This state is never desired by anyone. The unemployment rate is the percentage of unemployed workers in the labor force. The unemployment rate is the economic indicator used for measuring unemployment. Unemployment and currency strength have an indirect relationship.

People are classified as unemployed if they meet the following criteria:

  • Do not have a job.
  • Are available for work.
  • Have searched for work at least four weeks prior to the time.

The labor force is made up of both the employed ( those who have a job) and the unemployed. Anyone who does not fit in this description is not part of the labor force.

The Cost of Unemployment

Unemployment comes with a cost that is borne by the individual, the government and the society.

Individual Costs

Unemployed

The unemployed do not have a source income due to the loss of earnings. This affects their purchasing power and standard of living. Unemployment is a major cause of poverty.

Governmental Costs

The government also suffers from a high unemployment rate. First of all, there is a reduction in tax revenue because less people are paying income tax. Also, there is less spending due to the financial position of the people leading to less VAT revenue.

Furthermore, the government will have to spend more on unemployment and related benefit. This leads to a higher burden on the government. Finally, the summation of these events ( reducing revenue and increasing costs) can lead to the government borrowing funds.

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Societal Costs

Unemployment also affects the society adversely. This happens because unemployment causes a reduction in the nation’s GDP. This is a result of the reduction of output caused by the loss of human capital due to unemployment.

Moreover, the unemployment of some can also lead to the unemployment of others. This is because purchasing power of the unemployed is greatly reduced affecting those they purchase from. This creates a cascade effect that ripples through the economy.

Unemployment and Currency Strength

When the unemployment rate is high it negatively impacts the economy. This then causes a decline in the strength of a nation’s currency.

When unemployment rates are low, the economy is boosted and the country’s currency strengthens.

In conclusion, unemployment is inversely correlated with currency strength. When unemployment rises, currency value drops and vice versa.

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