Rising Unemployment Sparks Interest Rate Cut Debate
The Australian economy is currently facing a significant challenge, with the latest labour force statistics indicating an increase in the unemployment rate. This uptick raises important questions about monetary policy, particularly regarding potential interest rate cuts by the Reserve Bank of Australia (RBA).
Recent Trends in Unemployment
As of September, the unemployment rate climbed from 4.3% to 4.5%, marking its highest level since November 2021. This rise in unemployment is notable as it contrasts sharply with the rate of 3.9% recorded a year ago, and it has remained above 4% for ten consecutive months, indicating a trend of increasing joblessness.
Implications for Monetary Policy
The current economic climate poses a dilemma for the RBA’s monetary policy board, which has been focused on balancing inflationary pressures with a relatively optimistic view of the labour market. In its September meeting, the board characterized labour market conditions as “broadly steady,” but the recent unemployment increase may necessitate a reassessment of this viewpoint. The RBA’s mandate emphasizes maintaining “the maximum level of employment consistent with low and stable inflation,” yet the current unemployment rate exceeds most estimates of full employment. This mismatch raises the likelihood that the RBA will consider an interest rate cut to stimulate job creation and bolster economic growth.
Deceleration in Employment Growth
A contributing factor to the rising unemployment rate is the slowdown in employment growth. In 2024, approximately 32,600 new jobs were created monthly, marginally outpacing the average of 33,900 individuals actively seeking work. However, the situation has significantly deteriorated in 2025, with only 12,900 new jobs being created each month. Although the influx of job seekers increased by an average of 22,100, the widening gap between job creation and job seekers has resulted in higher unemployment rates.
Indicators of a Cooling Job Market
Several economic indicators point to a cooling job market, highlighting the challenges faced by workers and employers alike. For instance, the growth in average hours worked has dwindled from 0.27% in 2024 to just 0.04% in 2025. The overall job growth saw a robust increase of 351,600 jobs in 2024, yet only 44,100 jobs were added in the first half of 2025. Furthermore, underemployment, defined as the proportion of employed individuals wishing to work more hours, has also risen from 9.9% to 10.4% since late 2024, signaling that many employed individuals are not fully utilized.
Role of Government Spending
Interestingly, the cause of slowing employment growth appears to be more closely linked to trends in government expenditure than initial expectations suggested. Since mid-2021, the non-market sector, which includes sectors such as healthcare, education, and public administration, has been a primary driver of employment growth in Australia. Government initiatives aimed at enhancing the quality of services, including programs like the National Disability Insurance Scheme (NDIS) and childcare services, bolstered employment in these areas.
However, while a deceleration in government spending on these services was anticipated to slow employment growth, this has not been the primary factor behind the current slowdown in 2025. Instead, the employment rate’s decline is largely attributed to the market sector, where private employers are hesitant to create new jobs amid perceptions of weaker economic conditions.
Decline in Market Sector Employment
The current data indicates a stability in hours worked within the non-market sector, while the market sector has experienced a notable decline in employment rates. This decline results from private employers reducing their hiring efforts in response to the prevailing economic uncertainty. Such actions are reflective of a broader trend of a softening labour market, underpinning the concerns that the RBA must grapple with as it considers its future monetary policy options.
In summary, the rising unemployment rate in Australia, combined with slowing job growth and cooling market conditions, paints a complex economic picture that could propel the RBA to explore interest rate cuts as a means to stimulate the labour market and foster economic recovery. The interplay between government spending, job creation, and monetary policy will be critical in shaping the economic landscape in the months ahead.
