The International Monetary Fund (IMF) lists four economic variables in its key statistical annex to the World Economic Outlook.
These are the “real” gross domestic product (GDP), i.e. adjusted for inflation; consumer prices, better known as inflation; the current account balance, measuring a country’s trade and financial position with the outside world, and unemployment.
The apparent odd one out? This last one.
Social and economic breakdown
GDP, inflation and the balance of payments measure, respectively, growth, the loss of a currency’s purchasing power and whether a country is paying its way in the world. The unemployment rate, by contrast, merely tells us that a certain proportion of those who would like to work are unable to do so.
Sometimes, as we shall see, it doesn’t even do that.
Of course, an unemployment rate of, perhaps, 50% or more would suggest imminent economic and social breakdown and would tell traders and investors to steer clear of backing the country in question. But the unemployment rate rarely rises above 20% of the workforce and in most developed countries it is considerably lower than that.
Yet market players watch the unemployment rates worldwide closely, along with the other key figures. Why?
There are two basic economic reasons for doing so. One is that a low level of unemployment, and a correspondingly high level of employment, indicates that people are earning the wages needed to provide for themselves and their families, thus bolstering consumer confidence and overall economic resilience.
Sell into a reckless boom
The other reason is that a high level of unemployment suggests a waste of human resources and a failure to properly utilise the available labour force, in turn signalling an economy that is functioning poorly.
Traders and investors also watch the jobless numbers to help judge the overall economic climate. Obviously, a rising unemployment rate suggests an economy that is stagnating or going into recession, while a falling rate indicates an economy that is growing.
But market participants need to remember that employment tends to be a "lagging" indicator. The unemployment rate over the years tells us where we have been, not necessarily where we are going. When major structural changes are being made to the economy, that lag can be considerable.
For example, in the Eighties, the convulsions caused by Margaret Thatcher’s reforms meant that British unemployment continued to climb right through to mid-1986, even though the economy came out of recession some years earlier.
There is one caveat arising from a simple question: what is the unemployment rate? The method by which the figure is calculated is all-important. Britain's "claimant count" is, as the name suggests, made up of those claiming unemployment-related benefits, thus changes to the eligibility rules can reduce the unemployment figure without there being any actual improvement in the job market.
UK ministers have, in the past, been accused of tweaking the rules in precisely this manner.
Today, Britain places greater emphasis on an internationally-accepted method of measurement that gives an unemployment rate percentage of the potential labour force – in other words, those of working age who wish to work but are unable to find a job.
This percentage varies greatly across developed countries. For example, the IMF forecast in April the following unemployment rates for 2019: 3.3% in Germany, 8.8% in France, 10.7% in Italy and 18.5% in Greece.
For the UK, it forecast 4.2% and for the United States 3.8%.
Two things to bear in mind about these figures are, first, that they count those who are unemployed, rather than the total of economically inactive people. Broadly speaking, someone is counted as unemployed if they are available for work. Those unavailable for work may be caring for family members, or they may be discouraged long-term unemployed who have given up on looking for a job.
Second, very high unemployment rates may not be all they seem, especially if the country in question seems relatively stable and even prosperous. Officially jobless people may in fact be working in the hidden economy, not least in businesses run by members of their own family.
So, what does a rising unemployment rate tell us? That depends on its causes. A cyclical recession in a well-functioning economy may be a buy signal, as the rise in unemployment may indicate a more efficient use of labour resources.
But a deep economic depression in a badly-functioning economy may be a sell signal if there is no end in sight to the downturn and thus the rise in unemployment.
How about a fall in unemployment? Again, you need to look for the reason behind it. If it is falling because of a steady and sustained economic recovery, it may be a buy signal. But if it is falling because of a reckless economic boom that is likely to turn to bust, that would probably be a sell signal.
Always bear in mind, as mentioned earlier, that unemployment is usually a lagging indicator. Traders and investors know this, which is why stock prices tend to rise alongside unemployment rate – often to the fury of those who are now out of work.
Some unemployment inevitable
This is particularly the case in contemporary Europe, given the mandatory consultation period during which employers are required to hold discussions with those whose jobs are at risk, thus delaying the impact on the unemployment rate.
An added twist is the current phenomenon of “zombie” companies that have been kept afloat by very loose monetary policies pursued in the wake of the financial crisis. Put bluntly, these are the businesses that ought properly to have folded already, so a sustained rise in unemployment may well indicate that such businesses have had their life support removed.
Two final thoughts on this topic. First, there will always be some joblessness, so-called frictional unemployment, as people moving from one employer or occupation to another register as unemployed for however brief a period.
Second, unemployment rate historical data shows that really chronic joblessness tends to come in spells and then disappear for decades at a time: the Twenties and Thirties, the Seventies and Eighties. We are currently in a period of historically low unemployment, but for how long?