Australia’s unemployment rate rises to 4.2% in July from 4.1% expected

Labor market conditions are a key element in assessing the health of an economy and therefore a key factor in currency valuation. High employment, or low unemployment, has positive implications for consumer spending and economic growth, boosting the value of the local currency. Furthermore, a very tight labor market – a situation where there is a shortage of workers to fill open positions – can also have implications for inflation levels, as low labor supply and high demand lead to higher wages.

The rate at which wages rise in an economy is key for policymakers. High wage growth means households have more money to spend, which usually leads to higher prices of consumer goods. Unlike more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persistent inflation, as wage increases are unlikely to be reversed. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

The weight each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have labor market mandates beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the sole mandate of the European Central Bank (ECB) is to keep inflation under control. However, and despite whatever mandates they have, labor market conditions are an important factor for policymakers, given their importance as an indicator of the health of the economy and their direct relationship to inflation.