Download the PDF
For central banks like the US Fed and the RBA with dual mandates that include full employment, timely and reliable labour market data are essential for navigating a complex policy environment. With the US government shutdown now in its third week, the delay in releasing official labour market statistics has left the Fed operating in a data vacuum. Australia has no such constraint.
The release of Australia’s September labour force data triggered a swift response in financial markets. Bond yields and the Aussie dollar fell, and the market-implied probability of a November rate cut by the RBA jumped from 40% to 70% after it was revealed that the unemployment rate rose from an initially reported 4.2% in August to 4.5% in September, well above expectations. At face value, the data indicate a material softening in conditions.
But labour market data are notoriously volatile and history shows that sharp monthly increases in the unemployment rate are often followed by partial reversals. While the figures are important, we believe they do not offer yet a definitive signal for monetary policy. So what, if anything, did we learn from this week’s labour market data?
Despite the rise in the unemployment rate and media reports of job losses, employment continues to expand, with 15k jobs created in the month of September. That said, the pace of growth has clearly moderated over the course of 2025, driven largely by a slowdown in non-market employment, including health and aged care, disability support and education. These sectors had been growing at unsustainable rates, with non-market employment responsible for 80% of job gains over 2023 and 2024, despite representing less than one-third of total employment.
This structural shift into the care sector was largely government-funded, and as fiscal pressures mount, non-market employment has slowed to more sustainable rates over 2025. At the same time, market sector employment has started to recover in line with the broader economy. But the market sector is not yet strong enough to receive the baton without a fumble, and this has led to the slowing in total employment growth this year. The good news is that the economic recovery is gaining traction, supported by 75bps of rate cuts delivered earlier this year, which have benefited consumers' disposable incomes and wealth. As the recovery broadens, so too will market sector employment.
But employment growth has not been strong enough to keep pace with labour supply, leading to an increase in the unemployment rate from 4.0% at the end of last year to 4.5% currently. The breakeven pace of employment growth required to stabilise the unemployment rate has been around 26k per month, compared to actual employment gains of just half that amount so far in 2025.
We have been surprised by the resilience in labour supply growth. We had been expecting a modest decline in workforce participation from peak levels as real disposable incomes recovered and the worst of the cost-of-living crisis passed. While the income gains have largely played out as we expected, the downward trend in participation has been more modest. Further, we had been expecting a continued slowdown in the growth of working age population as net overseas migration eased in line with government projections. Surprisingly though, working age population growth has accelerated since early this year, possibly reflecting seasonal timing differences in migration flows in response to policy changes. Had population growth slowed as we expected, then even with the tepid employment growth we have seen, the unemployment rate would have remained closer to 4¼% than 4½%.
If labour supply growth does indeed slow as we expect, then the breakeven employment growth that would keep unemployment steady over the coming year would be below 20k per month. While slightly above recent averages, it is clearly achievable if the economic recovery continues.
While the unemployment rate is now at the RBA’s estimate of its non-inflationary rate, it would be premature to describe the labour market as balanced. On the demand side, persistently elevated job vacancies alongside rising unemployment point to a mismatch between available roles and worker skills. The rise in youth unemployment to 10.5%, the highest since the pandemic, highlights the growing challenge for school leavers and graduates entering the workforce. Rising youth unemployment is a trend that often precedes broader labour market deterioration.
On the supply side, some pressures appear to be easing. The underemployment rate has trended to its lowest level since prior to the global financial crisis, suggesting that more workers have secured their preferred working hours. Additionally, the decline in multiple job-holders, particularly among those already working full-time, may reflect a moderation in cost-of-living pressures and reduced need for supplementary income.
Taken together, these indicators suggest that while the labour market is softening, it is doing so unevenly. The rise in the unemployment rate likely reflects a mismatch between slowing demand and resilient supply, which adds uncertainty to the labour market outlook.
In a world of data dependent central banks, each economic release takes on added significance for monetary policy. While the Fed is flying blind amid a government shutdown, the RBA has the advantage of timely labour market data. Unfortunately, the volatility of the Australian data means it will take more than one month’s figures to separate signal from noise. With this being the final labour market release before the November meeting, the RBA’s decision to cut or hold will hinge upon the outcome of the September quarter CPI. A strong inflation print, as we expect, may prevent the RBA from cutting in November. But if labour market softness persists, the case for a December rate cut will strengthen.
