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But the bigger picture suggests the RBA should remain patient
Labour market data are notoriously volatile. The December employment report lived up to its reputation with an outsized gain in jobs of 65k for the month compared to our above-consensus forecast of 50k and the Bloomberg panel of experts’ median forecast for a 27k gain. The unemployment rate fell by 0.2 percentage points to 4.1% after having been as high as 4.4% just three months ago. Financial markets responded to the strong data by increasing the odds of a February rate hike by the RBA to 60%, from 25% prior to the release.
In reality, the labour market isn’t as strong as this one print suggests and changes to seasonal sales and hiring patterns may have influenced the result. Consistent with this, the ABS noted a particularly large contribution to employment from the 15-24 year-old age cohort.
Looking back at the trends over the last year, there has been a clear slowing in labour demand. Over 2025, 181k jobs were created compared to 321k jobs in 2024. The higher 2024 outcome was entirely driven by non-market employment in the care sector, which was responsible for around three-quarters of the job growth. However, throughout 2025, jobs growth in the care sector ground to a halt. The slow-down in jobs growth has spread more widely to all non-market sectors including health, education and public administration, reflecting the slowdown in the rate of growth of government spending.
Fortunately, as government spending has slowed, private sector spending has picked up pace. The shift towards private sector growth has been slowly building since the second half of 2024, when household spending received a boost from the Stage 3 income tax cuts and other government subsidies. Over 2025, slowing inflation and interest rate cuts further contributed to rising disposable incomes and spending. This allowed households to emerge from the depths of the cost-of-living crisis while interest rate cuts have also stimulated the housing market and the construction industry.
But with geopolitical tensions and global policy uncertainty weighing on domestic investment decisions, business investment continued to lag. It wasn’t until the second half of last year that business investment started to recover. The September quarter was boosted by investment in data centres as the hype of artificial intelligence spread to Australia, lifting private final demand growth to an annual rate of 3.1%, its fastest rate since early 2023.
The lift in private demand has been critical to stabilising the labour market. While annual employment growth slowed sharply from 2.7% at the end of 2024 to just 1.1% at the end of 2025, it did not collapse further due to the improvement in market sector employment. Another important implication of the shift in the composition of labour demand toward market sector employment is that it boosts labour productivity as production and employment shifted from the low productivity non-market sector to the more productive market sector. Over the last year, labour productivity has grown by 0.8% and we expect further improvement over 2026.
Given the slowing in employment, it is perhaps surprising that the unemployment rate only rose by 0.1% over 2025. The reason for this is that, at the same time as employment growth weakened, there was a concurrent slowing in labour supply, from 2.7% annual growth at the end of 2024 to 1.3% at the end of 2025. A moderation in population growth, as net overseas migration returns toward pre-pandemic levels, is contributing to the slower growth in labour supply. In addition, there has been a pullback in the labour force participation rate from its cost-of-living induced historical high point, which has also reduced the growth rate in the labour force.
At 4.1%, the unemployment rate remains well below pre-pandemic levels. Despite this, wage gains are running at a steady rate of around 3¼ - 3½%, a level that is consistent with a labour market roughly in balance. The transition in demand away from the public sector and toward the private sector, which is helping to improve productivity growth, is also easing pressure on business costs and inflation.In that context, the market reaction of pricing a rate hike in February is overblown.
One strong monthly outcome, particularly for a notoriously volatile data series, does not overturn a year-long trend indicating a slowing in labour demand. For the RBA, next week’s December quarter inflation result will matter far more than one labour market print. Absent a material upside inflation surprise, patience remains the better monetary policy response, as it allows the economy to transition onto a more balanced and productive footing.