“The number of people engaged in the labour market affects how investors perceive a country’s economy.”
The importance of the unemployment rate in a country cannot be overlooked, as the Central Bank of every country uses it to determine how healthy an economy is. Unemployment rate measures how many people in the labour force are currently engaged in the labour force and how many are actively seeking jobs. If there is a high rate of employment in a country, it will lead to a rise in interest rate because the Apex bank targets balancing growth and inflation, and the figure on the other hand, attracts large attention from traders in the markets.
Similarly, the employment rate of a country determines the strength of its currency because, when a low unemployment rate is recorded, foreign investors are led to believe that the economy of that country is healthy. In other words, they may seek investment opportunities in that country, causing a rise in the value of that currency. Contrarily, investors can interpret a rise in unemployment as a weakening economy, which will cause them to seek opportunities elsewhere and so the currency may depreciate.
In another context, an increase in unemployment leads to low consumer spending, because people who currently do not have a job, have little money to spend on unnecessary items. Those still employed worry for the future and also tend to reduce spending and save more of their income.
The Central Bank may likely delay a possible increase in interest rate if the unemployment in such country rises. For example, in the summer of 2011, some analysts expected an increase in UK interest. However, due to a succession of poor economic data the ECB pushed it back to 2012.
In addition to the unemployment rate, the two most important labour statistics are the US ADP and NFP figures, which are released each month. As a result of the huge attention the market attracts, in relation to the likely date of a hike in the Federal rate, the increase in the figure also serves as an important monitoring point each month.