Money Smart Athlete Blog

Unemployment, Inflation and Currency Values and their effect on the Money Smart Athlete

Aug 8, 2018 | Economic Environment

There are a number of economic indicators which give us clues as to how “successful” our economy is, how well it is growing, or how well positioned it is for future growth. These indicators include statistics, such as the number of houses being built or existing home sales, orders for durable goods (e.g., appliances and automobiles), consumer confidence, producer prices, and so on.  Alongside with GDP growth, unemployment and currency value are two of the most closely watched indicators, because they get at the heart of what our economy is supposed to accomplish: to provide diverse opportunities for people to participate in the economy, to create jobs, and to ensure that the purchasing power of people is quite stable.

Both unemployment and inflation affect the whole economy and that includes the sports industry and sports professionals as well.  Below we give a brief description of each economic indicator along with how they may possibly affect sports professionals.

Employment Rate

An economy produces not just goods and services but also jobs, because most people participate in the market economy by trading their labor, and most rely on wages as their primary source of income.

The employment rate, or the participation rate of the labor force, shows how successful an economy is at creating opportunities to sell labor and efficiently using its human resources. A healthy market economy uses its labor productively, is productive, and provides employment opportunities as well as consumer satisfaction through its markets.

The unemployment rate is a measure of an economy’s shortcomings, because it shows the proportion of people who want to work but don’t because the economy cannot provide them with jobs. There is always some so-called natural rate of unemployment because people move in and out of the workforce as the circumstances of their lives change—for example, as they retrain for a new career or take time out for family. But natural unemployment should be consistently low and not affect the productivity of the economy.

The employment market for elite sports professionals has traditionally been rather inelastic.  However, the employment market for lower-tier-income sports professionals is negatively affected by high unemployment.  High unemployment is usually the result of a recession and when faced with financial difficulty, sports teams tend to lower player salaries and make reductions in their playing rosters.  Money Smart Athletes should strive to negotiate longer term contracts which include hefty penalty clauses for premature termination so as to ‘bulletproof’ themselves as much as possible during periods of high unemployment.

Inflation and Currency Value

Stable currency value is an important indicator of a healthy economy and a critical element in financial planning. Like anything else, the value of a currency is based on its usefulness. We use currency as a medium of exchange, so the value of a currency is based on how it can be used in trade, which in turn is based on what is produced in the economy. If an economy produces little that anyone wants, then its currency has little value relative to other currencies, because there is little use for it in trade.  Therefore, a currency’s value is an indicator of how productive an economy is.

When the value of a currency decreases, an economy has inflation. Its currency has less value because it is less useful; that is, less can be bought with it. Prices are rising. It takes more units of currency to buy the same amount of goods. When the value of a currency increases, on the other hand, an economy has deflation. Prices are falling; the currency is worth more and buys more.

Inflation and currency value may affect athletes in different ways.  Currency exchange rates largely affect the real value of the playing contracts of international players.  A number of sports professionals who play abroad, sign contracts in currencies other than that of their home country.  As a result their contracts are sensitive to currency exchange fluctuations, especially because they may be sending money back home to their families or for investment purposes.  Therefore, international athletes need to be aware of the currency trends of the country they currently reside vis-à-vis the currency trends of their home country and they should try to use currency fluctuations to their benefit rather than their detriment.

In addition, inflation and foreign currency values have a direct effect on the Money Smart Athlete’s investment portfolio, in terms of the revenue earned which during inflationary times has a lower real value and also in terms of investments in foreign currencies, foreign stocks, bonds and real estate.  A good financial advisor can guide Money Smart Athletes through the complexities of currency values and inflation and can help them avoid a possible negative impact on their overall finances.  For an in-depth discussion on the topic of unemployment, currency values and exchange rates and how they affect athletes you may get in touch with us at [email protected]