Bold claim: economists aren’t rooting for high unemployment, but they sometimes seem to flirt with the idea that a little joblessness keeps inflation in check. Now, the latest data adds fuel to that debate. Inflation climbed to a frustrating 3.8%, then the RBA hiked rates, and this week unemployment remained stubbornly low. A 4.1% jobless rate is viewed by many economists as evidence the economy is running hot, which could justify more rate increases in the near term.
But pause for a moment and examine what that logic really implies. Do we genuinely want more people out of work so the rest of us can sleep a little easier about our mortgage rates? It’s a provocative question, but one worth asking. Most people don’t volunteer to tighten their own belts or push their families into poverty just to lower everyone else’s costs. Yet that tension lies at the heart of how central banks have operated for decades.
The Reserve Bank of Australia (RBA) has two core mandates: price stability and maximum sustainable employment. For 66 years, those twin goals have guided policy. In a climate of aggressive rate hikes over recent years, a surprisingly resilient labor market—despite higher borrowing costs—isn’t just unusual, it’s almost unprecedented.
Traditional textbooks would predict that persistent rate increases slow the economy and push firms to trim payrolls. And yet, while growth cooled, hiring remained stronger than expected. A contributor here has been elevated government spending, notably in healthcare and elder care, which continued to create jobs even as rates rose.
Over the past year, there’s been chatter about artificial intelligence and its potential impact on the job market. So far, employment hasn’t crumbled, but the situation could shift quickly if the technology changes the demand for labor.
What happens when the standard theory loses its grip? Many prominent commentators tend to fixate on headline data, and a familiar concept—the NAIRU, or non-accelerating inflation rate of unemployment—often crops up. The idea is simple: there exists a “just-right” unemployment rate that keeps inflation steady. But in practice, the magic number is unclear, ever-shifting, and sometimes outright inconsistent with outcomes.
Before the pandemic, unemployment dipped into the 4s and then the 3s, which complicates the current narrative. What our economists and central bankers are sometimes reluctant to admit is that they deliberately aim to engineer a portion of the workforce to be unemployed as a policy tool. It’s a provocative point that shouldn’t be brushed aside when media portrays certain groups as responsible for economic woes.
Historically, the RBA’s bar for full employment used to mean everyone who wanted a job could find one. Today, that definition has evolved, and the market’s tightness looks different depending on the lens you use.
Is the current jobs market as tight as the numbers suggest? At 4.1%, the unemployment rate sits low by broad historical standards. The inflation surge a few years back, which prompted a dozen successive rate increases, was daunting but ultimately helped avert a recession and a banking crisis. Living costs rose, but many households avoided default due to ongoing income streams.
Yet signs of cooling are emerging. A recent snapshot shows job creation slowing—February posted just 17,800 new roles, below the 20,000 forecast. The labor force participation rate has slipped from its peak, possibly tied to slower population growth and reduced immigration.
If participation had stayed at record highs, unemployment would have appeared higher. During immigration booms, maintaining unemployment steadiness required a substantial monthly job creation pace, around 40,000 roles, which is a hefty churn.
Over the last couple of decades, the public sector has expanded notably, driven by policy choices around education, aging populations, and disability services. What used to be roughly 22% of the workforce now sits closer to 29%. It’s possible this growth may plateau, with NDIS-related jobs stabilizing and private sector hiring cooling as higher interest costs bite.
In short, the labor market’s current strength defies simple explanations, and the interaction between inflation, rates, and employment remains a live debate. The big question is whether this is a temporary steadiness or the start of a new norm that challenges traditional economic playbooks. What do you think: should policy makers tolerate a hotter labor market to guard against recession, or push harder to cool employment to curb inflation? Share your view in the comments.
