Australian Employment Data in line with Expectations
Australia’s labour market began the year on a steady but unspectacular footing. Employment rose by 17,800 in January, broadly in line with market expectations of a 20,000 gain. The result follows volatile readings late last year, including a 30,300 decline in November and a strong 68,500 rebound in December. In addition to modest headcount growth, average hours worked increased by 0.6% in January, largely reflecting fewer people taking leave than is typical for the month.
The unemployment rate held steady at 4.1%, marking a shift from the gradual upward drift seen through most of 2025. Over the course of last year, the unemployment rate rose from 4.0% in the December 2024 quarter to 4.3% by September 2025, before easing to 4.2% in December and now trending closer to a 4.1% average. This stabilisation has occurred despite relatively subdued labour demand. On a three-month average basis, annual employment growth is running at just 1.1%, well below its long-run average of 1.9%, suggesting hiring momentum remains soft rather than robust.
The key driver behind the lower unemployment rate is not stronger employment growth but weaker labour force participation. Growth in the labour force has lagged employment, effectively compressing the unemployment rate. Participation has fallen by 0.6 percentage points over the past year, reflecting cyclical pressures that are currently outweighing longer-term structural trends supporting participation. A significant factor has been cost-of-living pressures, which have eased somewhat, reducing the marginal incentive for some individuals to enter or re-enter the workforce.
Looking ahead, this cyclical drag on participation could reverse if inflation and interest rates rise again, encouraging more people to seek work. Alternatively, participation may remain subdued, keeping the unemployment rate lower than otherwise expected. The base case is that participation gradually recovers over the year, lifting the unemployment rate modestly.
For the RBA, the data presents a nuanced picture. While the Board remains concerned about persistent inflation and views the labour market as tight, recent labour market outcomes do not clearly signal a re-tightening. Importantly, the fall in unemployment has been driven by lower participation rather than stronger hiring. Had participation remained steady over the past six months, the unemployment rate would be closer to 4.5% instead of 4.1%. As participation normalises, unemployment could drift higher again in coming months.
