Summary:
Westpac says January’s jobs data show a stable unemployment rate at 4.1%, but participation declines are doing most of the work. Underlying hiring remains subdued, and a rebound in participation could lift unemployment back toward 4.5% in coming months.
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Westpac says Australia’s January labour force report paints a steadier picture than the volatility of late 2025 suggests, but cautions that the apparent firmness in the unemployment rate is being driven more by falling participation than by renewed hiring momentum.
Employment rose by 17,800 in January, broadly in line with market expectations for a 20,000 gain but below Westpac’s forecast of 40,000. The outcome follows choppy readings in recent months, including a 30,300 decline in November and a 68,500 rebound in December. Average hours worked increased 0.6% over the month, partly reflecting fewer people taking leave than is typical for January.
The unemployment rate held at 4.1%, marking a break from the gradual uptrend seen through most of 2025, when joblessness rose from a quarterly average of 4.0% in late 2024 to 4.3% by September 2025. By December it had eased to 4.2%, and January’s print suggests it is tracking closer to a 4.1% average.
However, Westpac argues the stability in unemployment masks soft underlying demand. On a three-month average basis, annual employment growth remains at 1.1%, well below the long-run average of 1.9%.
The key driver of the lower unemployment rate has been a decline in labour force participation, which has fallen 0.6 percentage points over the past year. Growth in the labour force has been weaker than employment, effectively compressing the unemployment rate. Westpac estimates that had participation held steady over the past six months, the unemployment rate would be closer to 4.5%.
The bank attributes much of the participation weakness to cyclical forces, including easing cost-of-living pressures reducing the urgency for marginal workers to seek employment. While this dynamic could reverse if inflation and interest rates rise, Westpac’s base case is for participation to lift over the year ahead — which would, in turn, push unemployment higher.
For the Reserve Bank of Australia, the data complicates the outlook. While policymakers remain alert to inflation persistence and continue to characterise the labour market as tight, Westpac is hesitant to describe recent developments as a “re-tightening,” particularly given benign wages data. A participation-driven drop in unemployment, it argues, carries a very different inflation signal than one driven by accelerating hiring.
This screenshot shows the dates of Reserve Bank of Australia policy meetings in 2026.
