Australia's jobs market shows further signs of softening

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The RBA can wait but not relax

Higher interest rates are gaining traction

Data released this week indicate that Australia’s labour market is continuing to soften. The unemployment rate was 4.7% in September, unchanged from August following an upward revision, while employment fell by 39,300. The release was undoubtedly weaker than expected, prompting markets to ratchet down the odds of a November rate hike and pushing 2-year government bond yields around 5bps lower.

However, monthly labour market data are notoriously volatile, so it is worth stepping back from the September result and looking at the broader picture. The labour market has been gradually loosening since the unemployment rate reached its post-pandemic low of 3.4% in late 2022. That adjustment was to be expected as the RBA lifted interest rates from crisis-era lows to increasingly restrictive levels. More recently, as the RBA has been forced to tighten policy again this year, the unemployment rate has risen from 4.1% at the beginning of the year to 4.7% in September.

The gradual softening in the labour market is consistent with the broader slowing underway in the economy. Higher interest rates are increasingly weighing on interest-sensitive sectors of the economy, with the housing market the most notable example. Real GDP growth has already slowed to a below-trend pace over the first half of the year, and we expect annual growth to slow from 2.3% in FY26 to 1.6% in FY27. With the economy slowing and the outlook uncertain, businesses have become more cautious in their hiring, weighing on demand for labour.

But we are still close to full employment

However, a softening labour market should not be confused with a weak one. Although the unemployment rate lifted to 4.7%, other measures of the labour market remain healthy. The underemployment rate remains low relative to history, while the ABS measure of job vacancies is still at an elevated level, indicating that demand for labour has not collapsed. These measures point to a gradually loosening labour market rather than one in significant distress.

There is also an open question over what constitutes a balanced labour market. Following the stronger-than-expected unit labour cost data seen in the June national accounts, we raised our estimate of the non-accelerating inflation rate of unemployment (NAIRU) from 4.5% to 4.7%. The NAIRU is the level of the unemployment rate consistent with stable inflation. On our updated estimate, an unemployment rate of 4.7% suggests the labour market is currently around full employment, rather than having developed spare capacity.

What does this mean for the RBA? 

The RBA has also been debating this issue. The Board minutes released this week indicated that RBA staff were increasingly questioning the estimate of full employment assumed in their August forecasts. Documents released under a Freedom of Information request indicated that staff had been assuming 4.6% for the NAIRU, despite their models pointing to a number closer to 5%. The rise in the unemployment rate is therefore helping to ease labour cost pressures, but labour market conditions likely need to loosen further to ensure inflation can return sustainably to target.

Our forecasts see the unemployment rate rising a little further from here to just under 5%. With the labour market clearly moving in the direction needed to ease inflation pressures, the central bank will take some comfort that its policy tightening to date is working. Together with signs of softening elsewhere in the economy, this gives the RBA some scope to remain on hold in the near term and assess the impact of the substantial tightening already delivered. However, the adjustment in the labour market remains gradual and, with the Iran war posing an ongoing upside risk to inflation, the RBA cannot declare victory yet. While not our base case, further hikes remain a possibility if inflation doesn’t moderate as expected.