Australia’s January unemployment rate reached 4.1% and employment change reached 0.5K.

Labor market conditions are a key factor in assessing the health of the economy and are therefore a key driver of currency valuation. High employment or low unemployment have a positive impact on consumer spending and thus economic growth, which increases the value of the local currency. Moreover, a very tight labor market, with a shortage of workers to fill vacancies, may have an impact on inflation levels, so monetary policy driven by low labor supply and high demand leads to higher wages.

The rate at which wages grow in an economy is important to policymakers. Higher wage growth means households have more money to spend, which typically leads to higher prices for consumer goods. Unlike more volatile sources of inflation, such as energy prices, wage increases are unlikely to be reversed and are therefore considered a key component of basic, sustained inflation. Central banks around the world pay close attention to wage growth data when deciding monetary policy.

The weight each central bank allocates to labor market conditions varies depending on its objectives. Some central banks explicitly have powers related to the labor market that go beyond controlling inflation levels. For example, the U.S. Federal Reserve (Fed) has the dual mandate of maximizing employment and stabilizing prices. Meanwhile, the European Central Bank’s (ECB) sole mission is to control inflation. Nonetheless, labor market conditions are an important factor for policymakers, given their importance as a measure of economic health and its direct relationship with inflation.