Has Australia's Jobs Market Taken a Turn? What Does This Mean for Interest Rates?

Australia's latest employment figures have complicated the Reserve Bank's job. Just weeks after lifting the cash rate to 4.60%, the RBA is confronting evidence that the labour market may be weakening faster than expected.

The ABS has reported that employment fell by 39,300 people in September, while unemployment reached 4.7%, its highest level in almost five years.

The composition of the employment decline is particularly interesting. Part-time employment fell by 73,700, partly offset by an increase of 34,400 full-time workers. The participation rate declined to 66.8%, while the proportion of working-age Australians employed fell to 63.6%.

Importantly, the unemployment rate can understate a weakening labour market when people stop looking for work and consequently leave the labour force.

However, there is an important qualification.

The ABS's less volatile trend estimates show employment actually increased by 15,700 during September, while trend unemployment remained at 4.6%. Total hours worked also increased marginally.

These figures suggest caution before concluding that employment has entered a sustained contraction.

What does this mean for the RBA?

The RBA increased the cash rate by 25 basis points to 4.60% on 29 September, citing persistent inflation and rising energy costs.

The inflation problem remains substantial. Annual headline inflation reached 4.0% in August, while underlying inflation, measured by the trimmed mean, stood at 3.6%. Both exceed the RBA's 2–3% target.

The policy dilemma is straightforward. Higher interest rates restrain spending and inflation, but they also weaken business activity and employment.

The danger is that monetary policy, which operates with considerable delays, could continue restraining the economy after inflationary pressures have begun easing.

Equally, cutting rates prematurely could allow inflation to become entrenched.

The next important test comes on 28 October, when the ABS releases September inflation figures, ahead of the RBA's 3 November decision.

For now, the employment figures strengthen the case for holding interest rates steady while the RBA assesses whether the labour-market deterioration is temporary or sustained.

Further tightening would require increasingly persuasive evidence that inflation, rather than unemployment, represents the greater economic risk.