The ‘messy’ trend behind Australia’s rising unemployment is worrying economists | Australian economy

Jim Chalmers will reveal Australia’s enviable economic performance in recent years as he moves among the global elite during the G20 chatfest in Washington this week with other finance ministers and big investors.

A particular source of pride has been the strength of the labor market.

Not only has unemployment remained low, but the increase in the share of working-age Australians with a job has also increased by 3.1 percentage points since just before the pandemic.

This increase is twice the OECD average and compares with zero growth in the US and New Zealand. Employment rates in Canada and the United Kingdom fell by 0.4 percentage points and 1.1 percentage points, respectively.

But that performance was overshadowed this week after the unemployment rate unexpectedly rose to 4.5%, its highest level in nearly four years.

The Reserve Bank of Australia and the Treasury expected this upward trend to stall around 4.3% after falling to 3.4% in late 2022, the lowest in nearly 50 years.

AMP chief economist Shane Oliver says the unemployment rate is in a “clear upward trend”.

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The RBA board has made clear that it will not consider further rate cuts until it is confident that inflation will continue to fall throughout the September quarter. But the latest workforce data has complicated the issue.

“An increase beyond that would likely breach the RBA’s full employment target,” says Oliver.

“Of course, the rise in unemployment may reflect the lagged effect of last year’s weak economic growth, but it may also reflect a complex transition from the public sector to the private sector, which is the main driver of jobs.”

This “complex” handover worries experts.

Major increases in federal funding for the care economy – from aged care, childcare and health more generally – have led to a surge in hiring, which accounts for the lion’s share of the more than 1 million jobs created since Labor took office in 2022.

Approximately 80-90% of employment growth in calendar years 2023 and 2024 occurred in these so-called “non-market” segments, or industries heavily supported by taxpayers.

This is not to belittle the roles.

As Chalmers is quick to point out, “these are real jobs.”

“They look like real jobs to me – looking after older people, people in the NDIS and early childhood education,” she said last month.

But this dynamic is key to understanding why employment can continue to rise while the economy nearly stagnates.

Now, as Oliver says, we face a “complicated handover” situation as the private sector tries to fill the hiring gap.

Westpac economist Pat Bustamante calculates that unemployment could head towards 4.8% by early 2026 if the private sector cannot grow fast enough to replace slowing growth in government spending.

Which direction it will go from here is highly uncertain and economists now see the possibility that the RBA may feel the need to cut rates at its Melbourne Cup day meeting.

Not everyone believes that the job market will worsen or that the central bank will cut interest rates again.

Jonathan Kearns is Challenger’s chief economist and a former senior RBA official.

Kearns thinks people and investors are overreacting to a bad employment number.

It says employment rose in September but not as high as expected, which combined with an influx of new job seekers pushed up the unemployment measure.

This situation could easily reverse in October, with the RBA board likely to hold steady at its “critical” quarterly inflation figure on 29 October.

“It all came so easy,” Kearns says. “Inflation fell faster than expected and unemployment did not rise as much as expected. Things were looking incredibly good, and you’re always going to hit some bumps in the road.”

Patrick Commins is Guardian Australia’s economics editor