Labour Market Update

The latest seasonally adjusted November data has been released, and it’s a mixed bag. While there’s something for everyone, the numbers are sprinkled with the usual monthly volatility.

Overview of the Labour Market

Taking a step back, the overall message remains the same. The labour market is easing gently but remains healthy by historical standards and is likely still slightly tight. This means that while things are slowing down a bit, the job market is still in a good place.

Key Indicators

Participation and employment-to-population rates are continuing to moderate but are still relatively high. Underutilisation, which measures the number of people who are not working as much as they would like, is rising but is still below the long-run average. Additionally, the trend of monthly job generation continues.

Understanding Underutilisation

The labour market narrative is perhaps best captured by the gentle lift in underutilisation. This is a better measure of labour supply than just the unemployment rate, as it takes into account people who are working part-time but want to work full-time, as well as those who are not actively looking for work but are willing to start immediately. The increase in underutilisation suggests there’s a little more capacity in the labour market, which is helpful given the ongoing demand for labour.

Implications for the Economy

The strength in broader measures of earnings, labour costs, and compensation is notable, especially at a time when core inflation is running above the ceiling of the Reserve Bank’s 2-3% target. This suggests that even with some moderation in trend employment growth, labour costs and compensation may not decrease significantly. Unless productivity picks up on a sustained basis, this could continue to challenge the return to sustainable within-target mid-point inflation.

Future Outlook

Given the ongoing labour force supply and some moderation in trend employment growth, it’s expected that the unemployment rate will move to the top of a 4.25%-4.5% range for much of 2026 and may even test a little above that at times. The upcoming November CPI release on January 7 and the Q4 CPI release on January 28 are likely to be closely watched.

Conclusion

In conclusion, the labour market is easing gently but remains healthy. The gentle lift in underutilisation and the strength in earnings and labour costs suggest that there’s still some capacity in the labour market. However, this may not be enough to temper labour costs and compensation, and the return to sustainable within-target inflation may continue to be challenging. The upcoming CPI releases will provide further insight into the state of the economy and the labour market.