The unemployment rate in the UK is measured and released by the Office for National Statistics (ONS) every month, and it represents the percentage of the labour force that is without a job but actively seeking work. For investors, the rate of unemployment is one of the strongest indicators of economic health as it has a knock on effect on other key indicators like inflation, consumer spending and interest rates.
Every month, the Office for National Statistics (ONS) releases the latest figures on the UK labour market from its Labour Force Survey (LFS). While this data is obviously important news for job seekers and politicians, it is also one of the most closely watched days in the calendar for investors.
The Unemployment Rate represents the percentage of the labour force that is without a job but is actively seeking work. It’s important to note that this figure doesn’t include everyone who isn’t working. Students, retirees, and those not looking for a job are classified as ‘economically inactive’.
When investors are interpreting unemployment figures, they’re typically looking for three things:
- The headline rate: Is this figure going up and down?
- Wage growth: Are pay packets getting bigger?
- Vacancies: Are companies trying to hire?
Why do investors care?
For investors, employment data is a key economic health indicator and can be a key catalyst for other key indicators. It can have a direct effect on interest rates, consumer spending and inflation.
- The link to interest rates
This is the biggest reason the markets care about jobs data. Unemployment is a key data point for the Bank of England Monetary Policy Committee when determining their base rate of interest, which determines the cost of borrowing for other banks.
If unemployment is low: businesses are in greater competition over staff, pushing wages higher. When wages increase, so does consumer spending, and inflation can follow suit. The Bank of England may raise interest rates to stop the economy from ‘overheating’. Higher rates are tougher on borrowers, and cause markets to dip as debt becomes more expensive.
If unemployment rises: this suggests a potential slow down in the economy, and the Bank of England may cut interest rates to try and stimulate growth. Lower rates are often welcomed by markets and investors, as they make borrowing cheaper and encourage spending.
- The link to corporate profits
The UK economy is heavily driven by consumer spending, and this has strong links to employment.
When jobs are safe (low unemployment): People buy cars, book holidays and subscribe to services. This pushes profits up for consumer goods and services companies like airlines, high-street shops and restaurants.
When jobs are at risk (high unemployment): Consumers tighten their fists and generally stick more to essential spending. In this environment, consumer essentials suppliers like supermarkets and utilities tend to show more resilience, whilst higher end discretionary spending like luxury goods and leisure suffer.
- The ‘good news is bad news’ conundrum
Drawing a clear link between job growth and a robust economy can be tricky, and the stock market's reaction to positive employment data is not always consistent.
This often happens due to inflation fears. If the job market is doing ‘too well’, investors’ inflation fears deepen, and predictions of Bank of England rate increases can dampen market spirits. Markets prefer a stable number that shows a strong economy, without being so strong inflation fears creep in.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation.
Important to know: When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment.
1Tax treatment depends on individual circumstances and may be subject to change in the future.