Drop in S. Korean unemployment has little meaning

Drop in S. Korean unemployment has little meaning PART 1 OF 1

Drop in S. Korean unemployment has little meaning

Drop in S. Korean unemployment has little meaning

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Korean unemployment dropped to 3.2% in March, versus a consensus number of 3.3%.

The newly released South Korean unemployment numbers are not meaningful, for two key reasons:

  1. The first is that the value is not particularly low when compared with historical values. While the value is low compared to the current U.S. unemployment rate, it is in line with the past couple of years in South Korea. Since mid-2012, unemployment had hovered roughly between 3.0 and 3.5%, with a spike at the end of Q1 in 2011, similar to the one in February. A value of 3.2% is simply back to the normal levels, repeating the Q1 spike.
  2. The second reason is that the labor participation rate actually fell 0.4%, helping decrease the unemployment rate. The labor participation rate is the amount of people employed or actively looking for job as a percent of the total population. If people are discouraged and stop looking for jobs, they are not counted within the unemployed value.

Glimpse of hope

South Korea’s PMI was among the strongest readings for March in emerging markets signaling an expansion of the economy. The jump to a value above 50 was welcomed after two months below the 50 point neutral growth line.

Another positive factor that may be revealed tonight is a cut in interest rates by the Bank of Korea, which will hold its monetary policy meeting today. If rates are cut, it may help boost growth, though it could cause depreciation of the Korea Won, which would hurt returns for foreign investors.

The region is experiencing great momentum led by China, though Japan’s steep depreciation of the Yen has led to increased price competitiveness against Korean companies. In the short term the direction may be uncertain, though in the medium to long term it is likely that Korea will return to a recovery path in line with the rest of the region.

The cut in interest rates in South Korea, along with the recent announcement of $15.3 billion in fiscal stimulus could help lower unemployment further, without dropping labor force participation. This would be positive for the iShares MSCI South Korea Index ETF (EWY), the iShares MSCI Emerging Markets Index ETF (EEM), and the Vanguard MSCI Emerging Markets ETF (VWO).


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