Labor Market and exchange rate
Continues a series of publications devoted to the study of fundamental analysis of the international currency market (FOREX), begun in ? ? 27-34 FOREX MAGAZINE.V previous issue we examined the relationship of inflation, interest rates and exchange rate changes. Today we will examine the impact of the labor market to changes in exchange rates.
The labor market and unemployment
Regularly (monthly or weekly) published a number of economic indicators of the current state of the labor market. The most significant of them - is the number of new jobs in non-agricultural sphere (Nonfarm Payrolls), unemployment (Unemployment Rate) and the number of requests for unemployment benefits (Jobless Claims). The market is giving them enough attention, especially one of the indicators that reflected in significant fluctuations in exchange rates associated with the output of the data. Let's investigate why the market gives the value of the labor market.
So, the accepted measure of unemployment, as the number of unemployed persons in the national economy to the total workforce (per cent). When talking about unemployment, then taken to distinguish between the natural rate of unemployment - the number of non-working able-bodied people in the normal steady-state economy, and cyclical unemployment - deviations from the natural level, associated with short-term fluctuations in economic activity. It is believed that the natural rate of unemployment for the U.S. economy in recent years is within the limits of 5.5-6%, although its precise measurement is hardly possible.
The existence of the natural rate of unemployment in the long run due to several reasons.
First, it should be noted that when changing jobs job requires a certain time. Such unemployment is related to the fact that the labor market is constantly a number of individuals involved in the change of place of work is called friction.
Secondly, the labor market does not have a permanent vacancy, which is essential for all job seeking work. In these situations, talk about structural unemployment, providing longer breaks rabote1.
Over time, the natural rate of unemployment may vary.
1 Explanation of the causes of structural unemployment is not included in the discussion of this publication. Relevant information can be found in textbooks on economic theory.
Effect of short-term changes in the labor market on the exchange rate
To address this issue must be another theoretical digression.
It is generally accepted that between unemployment and inflation in the short run there is an inverse relationship. Ie high inflation is accompanied by relatively low unemployment, and vice versa. The graph looks like this.
Fig.1. "Phillips Curve" - the relationship of inflation and unemployment in the short run
This dependence is called "Phillips curve" in honor of English economist, first pay attention to its existence.
Briefly explain the legality of the approval of the inverse relationship between inflation and unemployment, without going into macroeconomic wisdom, can, for example, the case.
With the growth of prices (higher inflation) becomes profitable to producers to increase production volumes. To solve this problem in the short run, they will hire more workers, leading to lower unemployment.
Understanding this relationship is necessary to understand the motives and effects of government monetary policy. Changing money supply, the Central Bank may pursue the goal of combating inflation and reducing unemployment.
However, remember the short-term nature of the identified dependencies. Ie conducting government activities, accelerating inflation, allowing only for a short time to reduce the unemployment rate. Then again, unemployment returns to its natural level, but inflation has so ago simply did not return.
Explain that you can in the above example. So in the short term manufacturers will hire more workers to increase production. However, in the long term in order to minimize production costs, they will be able to increase the capital base and return to the optimal combination of labor and capital. Some workers in this case would be dismissed.
If you recall about the previous publication of the division of economic variables on nominal and real, then we can say that inflation - is the nominal value, as well as shows how increased prices, as measured in monetary units, and unemployment - is a real value, as measured in physical units (number of people). And as we remember from a previous publication, monetary policy of the state in the long term affects only the nominal value.
And now back to the main issue - the impact of short-term changes in the labor market dynamics in the exchange rate. Suppose, for several months, there was an unfavorable situation in the labor market, as evidenced by the negative output data. Assuming that the state will try to solve this problem with the use of monetary (monetary) method, we get the acceleration of inflation. What happens in this case the national currency - in detail in previous publications. The currency to decline.
Effect of long-term changes in the labor market on the exchange rate
When we talk about long-term changes in the labor market, it is to change the natural rate of unemployment.
Consider this situation.
Your Nonfarm Payrolls may vary from month to month, but, let's say, for a substantial period of time (a year or more) occurred on its significant growth. In the economic literature, this information can be found that the growth rate of Nonfarm Payrolls 200 000 corresponds to an increase in GDP by 3%. How reliable such a conclusion, do not dare to judge, but the rebuttal, I do not reach. So, for a long period of time has been a considerable number of new jobs in non-agricultural sector. From this we can conclude that GDP growth in the coming months (years) will grow at a faster pace than previously. Now remember, what is the GDP. It consists of four components: personal consumption (C), investment (I), government expenditure (G) and net exports (NX) 2.
Y = C + I + G + NX
The increase in right-hand side of equality (GDP) growth is possible if one of (all) of his constituents.
If it will be government spending (G), then we will have a growth deficit (surplus reduction) state budget. The impact of this phenomenon on the dynamics of the national currency, we examined in detail in a previous publication (? 31 FOREX MAGAZINE). Exchange rate in this case should grow. If this is the growth of net exports, which determines the demand for local currency at the currency exchange market, the nominal exchange rate should also rise. Investment growth will mean increased demand for borrowed funds, which will lead to an increase in real interest rates and, ultimately, also to an increase in the exchange rate. All these considerations can be verified in the graphs.
Thus, concludes. With the positive developments in the labor market (reduction of unemployment, the growing number of new jobs, etc.), regardless of what time period we are considering, the nominal exchange rate should grow. And vice versa.
2 The method of determining the amount of GDP is not included in the discussion of this publication. The information on this subject can be found in any textbook on macroeconomics.
Continues a series of publications devoted to the study of fundamental analysis of the international currency market (FOREX), begun in ? ? 27-34 FOREX MAGAZINE.V previous issue we examined the relationship of inflation, interest rates and exchange rate changes. Today we will examine the impact of the labor market to changes in exchange rates.
The labor market and unemployment
Regularly (monthly or weekly) published a number of economic indicators of the current state of the labor market. The most significant of them - is the number of new jobs in non-agricultural sphere (Nonfarm Payrolls), unemployment (Unemployment Rate) and the number of requests for unemployment benefits (Jobless Claims). The market is giving them enough attention, especially one of the indicators that reflected in significant fluctuations in exchange rates associated with the output of the data. Let's investigate why the market gives the value of the labor market.
So, the accepted measure of unemployment, as the number of unemployed persons in the national economy to the total workforce (per cent). When talking about unemployment, then taken to distinguish between the natural rate of unemployment - the number of non-working able-bodied people in the normal steady-state economy, and cyclical unemployment - deviations from the natural level, associated with short-term fluctuations in economic activity. It is believed that the natural rate of unemployment for the U.S. economy in recent years is within the limits of 5.5-6%, although its precise measurement is hardly possible.
The existence of the natural rate of unemployment in the long run due to several reasons.
First, it should be noted that when changing jobs job requires a certain time. Such unemployment is related to the fact that the labor market is constantly a number of individuals involved in the change of place of work is called friction.
Secondly, the labor market does not have a permanent vacancy, which is essential for all job seeking work. In these situations, talk about structural unemployment, providing longer breaks rabote1.
Over time, the natural rate of unemployment may vary.
1 Explanation of the causes of structural unemployment is not included in the discussion of this publication. Relevant information can be found in textbooks on economic theory.
Effect of short-term changes in the labor market on the exchange rate
To address this issue must be another theoretical digression.
It is generally accepted that between unemployment and inflation in the short run there is an inverse relationship. Ie high inflation is accompanied by relatively low unemployment, and vice versa. The graph looks like this.
Fig.1. "Phillips Curve" - the relationship of inflation and unemployment in the short runThis dependence is called "Phillips curve" in honor of English economist, first pay attention to its existence.
Briefly explain the legality of the approval of the inverse relationship between inflation and unemployment, without going into macroeconomic wisdom, can, for example, the case.
With the growth of prices (higher inflation) becomes profitable to producers to increase production volumes. To solve this problem in the short run, they will hire more workers, leading to lower unemployment.
Understanding this relationship is necessary to understand the motives and effects of government monetary policy. Changing money supply, the Central Bank may pursue the goal of combating inflation and reducing unemployment.
However, remember the short-term nature of the identified dependencies. Ie conducting government activities, accelerating inflation, allowing only for a short time to reduce the unemployment rate. Then again, unemployment returns to its natural level, but inflation has so ago simply did not return.
Explain that you can in the above example. So in the short term manufacturers will hire more workers to increase production. However, in the long term in order to minimize production costs, they will be able to increase the capital base and return to the optimal combination of labor and capital. Some workers in this case would be dismissed.
If you recall about the previous publication of the division of economic variables on nominal and real, then we can say that inflation - is the nominal value, as well as shows how increased prices, as measured in monetary units, and unemployment - is a real value, as measured in physical units (number of people). And as we remember from a previous publication, monetary policy of the state in the long term affects only the nominal value.
And now back to the main issue - the impact of short-term changes in the labor market dynamics in the exchange rate. Suppose, for several months, there was an unfavorable situation in the labor market, as evidenced by the negative output data. Assuming that the state will try to solve this problem with the use of monetary (monetary) method, we get the acceleration of inflation. What happens in this case the national currency - in detail in previous publications. The currency to decline.
Effect of long-term changes in the labor market on the exchange rate
When we talk about long-term changes in the labor market, it is to change the natural rate of unemployment.
Consider this situation.
Your Nonfarm Payrolls may vary from month to month, but, let's say, for a substantial period of time (a year or more) occurred on its significant growth. In the economic literature, this information can be found that the growth rate of Nonfarm Payrolls 200 000 corresponds to an increase in GDP by 3%. How reliable such a conclusion, do not dare to judge, but the rebuttal, I do not reach. So, for a long period of time has been a considerable number of new jobs in non-agricultural sector. From this we can conclude that GDP growth in the coming months (years) will grow at a faster pace than previously. Now remember, what is the GDP. It consists of four components: personal consumption (C), investment (I), government expenditure (G) and net exports (NX) 2.
Y = C + I + G + NX
The increase in right-hand side of equality (GDP) growth is possible if one of (all) of his constituents.
If it will be government spending (G), then we will have a growth deficit (surplus reduction) state budget. The impact of this phenomenon on the dynamics of the national currency, we examined in detail in a previous publication (? 31 FOREX MAGAZINE). Exchange rate in this case should grow. If this is the growth of net exports, which determines the demand for local currency at the currency exchange market, the nominal exchange rate should also rise. Investment growth will mean increased demand for borrowed funds, which will lead to an increase in real interest rates and, ultimately, also to an increase in the exchange rate. All these considerations can be verified in the graphs.
Thus, concludes. With the positive developments in the labor market (reduction of unemployment, the growing number of new jobs, etc.), regardless of what time period we are considering, the nominal exchange rate should grow. And vice versa.
2 The method of determining the amount of GDP is not included in the discussion of this publication. The information on this subject can be found in any textbook on macroeconomics.
Andrew Khamidullin
to Forex Magazine
fxtrade@tomsk.ru
to Forex Magazine
fxtrade@tomsk.ru
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