Australia’s jobs market is set to stay relatively tight even as unemployment edges higher and wage growth slows under the RBA’s plan to tame inflation without triggering a sharp rise in joblessness
The Reserve Bank of Australia (RBA) expects the jobs market to remain relatively tight over the next couple of years, even as wage growth gradually slows.
At the same time, the central bank is relying on higher interest rates to cool demand just enough to bring inflation back towards target without triggering a sharp rise in joblessness.
According to the RBA, The Wage Price Index (WPI) was 3.4% in the December quarter and is expected to ease slowly to around 3% by June 2028, pointing to a gradual moderation in wage pressures rather than an abrupt drop.
The latest Wage Price Index (WPI) datafrom the Australian Bureau of Statistics, revealed a peak in the index in December 2023 quarter, with annual growth reaching 4.3%.
Since then, the WPI has been gradually declining, with the September 2025 quarter reporting annual growth of 3.4%.
Labour market: tight for now, only gradual easing later
The RBA is projecting a period of continued labour market strength, followed by a slow softening rather than a sudden downturn.
In the near term, the unemployment rate is expected to be “broadly stable” before it begins to creep higher as economic growth slows. The forecast has unemployment rising gradually to around 4.6% by mid 2028, up from the current 4.2% but still low by historical standards.
Leading indicators such as job ads, vacancies and business employment intentions suggest labour demand could ease a little over coming quarters. However, this is being offset by stronger than expected momentum in economic activity, particularly in private demand.
Taken together, the RBA judges that labour market conditions will remain broadly steady over the next few quarters, rather than deteriorating quickly.
From late 2026, as higher interest rates start to weigh more noticeably on spending and GDP growth falls below its potential rate, the central bank expects the unemployment rate to “edge higher”. Underemployment – people who have a job but want more hours – is also forecast to rise modestly.
Participation and employment-to-population: small step down from very high levels
While unemployment drifts higher, the RBA expects some subtle but important shifts in how many Australians are in work or looking for it.
The outlook for both the employment to population ratio and the participation rate has been revised down slightly compared with the RBA’s previous forecasts.
Population growth is assumed to ease from the very strong rates of recent years, while the share of the population in work is expected to decline gradually as economic activity slows.
The participation rate – the share of people either working or actively looking for work – is forecast to be broadly stable overall, but with a slight decline in the near term.
The RBA noted that while long run trends, such as rising female participation, should continue to support participation, there will likely be “less incentive to enter or remain in the labour force than in previous years.”
That reduced incentive reflects two factors:
·A possible easing in cost of living pressures, seen in the recent decline in the multiple jobholding rate during 2025, which suggests fewer workers are needing second jobs to make ends meet.
·Lower job finding rates for both the unemployed and new entrants to the labour market, which may discourage some people from actively seeking work.
Growth in non market sector employment – such as public sector and community services jobs – is expected to be weaker than the very strong rates recorded in recent years, shifting the emphasis more towards private sector hiring.
Wages: from solid gains to a gradual slowdown
Wage growth is expected to slow gently over the coming years, even as the labour market stays relatively tight.
The WPI rose by 3.4% over the year to December, reflecting still firm pay gains as businesses compete for labour in a tight market. But the RBA expects that pace to ease gradually as economic growth cools and capacity pressures abate.
By June 2028, wage growth is projected to be closer to 3%. That profile – moving from the mid 3s down to around 3% – points to a slow, controlled moderation in wages rather than a sharp downturn in incomes.
In the near term, the RBA still expects underlying quarterly wages momentum to be broadly stable, though the timing of large enterprise agreements and public sector wage decisions could create some quarter to quarter volatility.
Over the medium term, however, the overall trend is towards slightly softer wage growth as unemployment edges higher from current lows, the labour market shifts closer to balance rather than being clearly tight and demand growth in the economy cools as higher interest rates take effect.
This easing in wage growth is a key part of the RBA’s strategy to bring inflation back towards the 2–3% target band without causing a large spike in unemployment.
Unit labour costs and productivity: easing cost pressures over time
The RBA’s employment and wages outlook is tightly linked to its view on unit labour costs (ULCs) – the labour cost per unit of output – and the long running weaknesses in productivity growth.
Growth in nominal ULCs has been elevated in recent years, driven by both soft productivity and strong average labour cost growth. In recent quarters, ULCs have risen faster than the central bank previously anticipated, largely because average labour costs per worker have climbed more quickly than expected.
Looking ahead, the RBA expects growth in ULCs to ease over the forecast period, assuming interest rates follow the current market path. With wages growth slowing from 3.4% to around 3%, and productivity projected to pick up gradually, labour cost pressures on businesses should become less intense.
If that combination materialises, it should help reduce the pressure on businesses’ cost bases, in turn supporting a gradual decline in inflation even as the labour market remains relatively resilient.
Monetary policy and jobs: walking a narrow path
The RBA’s labour market and wage forecasts sit at the heart of its policy strategy: use higher interest rates to cool demand enough to relieve inflationary pressure, but not so much as to cause a sharp rise in unemployment or an abrupt wage slump.
On Tuesday (3 February), the RBA increased the cash rate from 3.60% to 3.85% - the first increase since November 2023.
Compared with its November projections, the RBA is now assuming a significantly higher path for the cash rate. Instead of further cuts, financial market pricing implies around 60 basis points of rate increases by the end of the forecast period.
The RBA acknowledges that its assessment of spare capacity and the balance of demand and supply in the labour market is highly uncertain. If recent strong inflation outcomes are signalling tighter capacity than its central scenario allows for, wage and price pressures could prove more persistent than the current forecasts suggest.
Conversely, if much of the recent inflation spike is indeed temporary or sector specific, wage growth could slow more than anticipated as higher interest rates bite.
What this means for workers and employers
For workers, the RBA’s central scenario implies a still favourable jobs market in the near term, but with pay rises gradually becoming more modest.
Key implications include:
·Ongoing job opportunities and relatively low unemployment in the short term, supporting job security
·Wage growth slowing from 3.4% towards 3% by mid 2028, meaning real income gains will increasingly depend on how quickly inflation falls
·A slightly more competitive jobs environment over time, as hiring slows and unemployment edges higher
For employers, the outlook suggests that while wage pressures remain present in the short term, they should ease gradually over the next few years. Firms that have struggled with rapidly rising labour costs may see some relief as:
·Pay settlements settle into a lower, more stable band
·Productivity improvements, if realised, help contain unit labour costs
However, in the nearer term, businesses in sectors still facing skills shortages or strong demand may need to continue offering competitive wages and conditions to attract and retain staff.
The RBA’s latest forecasts paint a picture of an Australian labour market that stays relatively strong, even as wage growth slowly cools.
