Research Note: Has Australia’s labour market turned a corner?

Since the pandemic, Australia has been experiencing a once-in-a-generation labour market, with the fastest rate of new job creation since 1994.

Labour force participation is at its highest level ever, driven by surging women’s employment. Casual work is at its lowest rate in a decade, and unemployment is at its lowest level since Gough Whitlam was Prime Minister!

While this strong labour market has underpinned Australia’s recovery from the disruptions of the pandemic, it has been challenging for employers.

Businesses have struggled to fill roles, as unfilled vacancies doubled to their normal levels. Job turnover has increased as employees exploit a buyer’s market for new opportunities. And wages have exploded, growing at their fastest rate since the mining boom.

Ai Group members have consistently told us their number one problem since the pandemic has been staff shortages caused by the historically tight labour market.

However, increasingly there are signs that the Australian labour market has turned a corner. As the economy has slowed, new job creation has stalled. Many industries have begun to cut back hours, and excess vacancies are starting to moderate.

This research note takes a deep dive into the latest employment data, identifying where and how Australia’s labour market is slowing. It shows that while headline unemployment figures remain strong, there are clear markers indicating a turning point in the labour market around the middle of 2023.

The return towards a more balanced Australian labour market has already begun. But the question remains how quickly the rebalancing will occur, and what this will mean for both employers and employees.

All quiet on the unemployment front

The unemployment rate is the most common way to measure the performance of the Australian labour market. If you only watch the unemployment numbers, you have likely concluded the labour market remains almost as tight as ever.

Unemployment has been very low since the pandemic – consistently below 4.0%. This was due to a combination of strong employment generation associated with pandemic recovery, alongside labour shortages caused by a lack of migration due to closed borders throughout 2020 and 2021.

You have to go back to 1974 for a period where unemployment was consistently below 4.0% in Australia.

There was a slight increase in the unemployment rate in the second half of 2023 – from 3.4% to 3.8% – and matching increases in the number of under-employed people and under-utilised hours.

These very small movements in the unemployment rate obscure more significant changes occurring below the surface.

Most industries began to cut back employment in 2023

A better indicator for assessing the labour market is to measure “hours worked” – effectively, the demand for labour being generated by employers. As the interactive chart below shows, this indicator tells a very different story to the unemployment data.

Across the course of 2023, the demand for labour hours fell by 0.8% in Australia. Twelve out of nineteen industries saw labour demand reduce, with particularly large falls in industrial sectors such as wholesale trade, construction, utilities and transport.

Given that the economy grew by 1.5% in 2023, the fact that hours worked fell by 0.8% indicates that employers have already begun to cut back on employment levels.

This data reveals a pattern whereby employers are now cutting back hours, but not staffing headcounts yet. Across the economy, the number of people in the workforce expanded by 2.8% in 2023 despite the fall in hours worked. This explains why unemployment has yet to significantly rise.

In some industries, this pattern is especially stark. Take Arts & Recreation, which grew the size of its workforce by 20.8% last year but hours worked only increased by 0.9%.

Headcount employment and unemployment numbers obscure the fact that there are now fewer hours to go around the growing Australian workforce.

Job creation falls to the lowest level since the pandemic

Net job creation rates – a measure of how many additional jobs are created each month – provide another indication that the Australian labour market is slowing.

Since the pandemic, net job creation rates have been very high, with the labour market adding between 30,000, to a peak of 75,000 new jobs per month.

For three years the monthly job creation numbers were considerably higher than the number needed to absorb new entrants to the labour market, approximately 35,000.

Whenever job creation rates exceed the amount required to absorb labour market entrants, unemployment will fall, and participation will rise.

But since July 2023, this pattern of ‘excess’ job creation has reversed. The number of new jobs created has crashed to around 25,000 per month. This is far lower than during the post-pandemic boom, and also lower than the number of new jobs required per month.

This is a strong indicator that the labour market began the process of rebalancing in the middle of 2023. If this pattern of below-required job creation continues, it will gently release pressure across the rest of this year.

Full-time jobs out, part-time jobs in

Job creation rates have not only slowed, but shifted from full-time to part-time roles.

For most of the post-pandemic boom, full-time job creation was dominant in Australia. Indeed, there were some months during late-2022 when part-time employment contracted, as workers switched in their thousands from part-time to full-time roles.

But as demand for labour has been cut back, the pendulum has swung back to part-time work. Part-time roles account for nearly all new Australian job creation since the middle of 2023.

Indeed, the number of full-time job creation has been negative in recent months. On a net basis, the Australian economy has not created any new full-time jobs since May 2023.

This shift to part-time work has spread the declining amount of job creation more thinly across a larger workforce than would otherwise have been the case. Doing so has helped prevent the unemployment rate rising very much, but also hides a clear weakness in job creation dynamics.

Vacancies soften, but an overhang of 155,000 unfilled jobs remains

During 2021 and 2022, the number of unfilled jobs roughly doubled – from around 1.5% to 3.0% of all jobs in Australia. By the winter of 2022, this led to an overhang of around 260,000 vacancies above the natural level associated with job turnover.

This excess of vacant jobs has also reduced – but there remains some way to go before vacancies return to normal levels.

As the labour market loosened slightly in the second half of 2023, the number of unfilled jobs began to fall. The number of vacant jobs dropped by 100,000 in the 18 months to the end of 2023, and the job vacancy rate eased from 3.0 to 2.4%. This is yet another indicator that balance is gently being restored to the labour market.

However, a lot of excess vacancies still have to be cleared. There remain 155,000 unfilled jobs above normal levels. Until this overhang is cleared, the slowing labour market is unlikely to lead to an increase in unemployment, as new labour market entrants and employees who lose their jobs can easily find vacancies.