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(Un)Employment

Employment figures are an important indicator of an economy's health. A strong economy creates new jobs, thus providing employment for the hundreds of thousands of people who enter the workforce every year. However, if the economy is growing strong and there are more jobs than people to fill them, wages begin to rise as companies compete for the best workers. This can be great for individuals but bad for the economy. When wages rise too fast, so does inflation, which forces the central bank to raise rates and cool the economy. When that happens, the job market traditionally falls off.

On the other hand, a weak economy that creates no jobs spreads uncertainty and tends to tighten consumption. Without consumption, economic growth stagnates, but it may stimulate the Federal Reserve to loosen interest rates, thus leading to economic growth. That's why a higher unemployment number can actually stimulate the market, whereas a lower one can depress it. For example, throughout early 2004, the markets nervously watched for any sign that the Federal Reserve Chairman would raise interest rates. When unemployment numbers showed that jobs were being created—hence raising the probability of an interest rate increase—the markets actually fell.


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