Wages Hold While Jobs Evolve

At first glance, Australia’s latest wages and labour market data look reassuring when it comes to jobs market strength. Wages are growing, unemployment is low, and jobs are still being created. But look a little closer and a more interesting and more important, shift is underway. The story of today’s labour market is no longer one of too few workers chasing too many jobs. Instead, it’s increasingly about a mismatch between the workers available and the skills businesses actually need.

That distinction matters. During the pandemic and its immediate aftermath, labour market challenges were largely cyclical. Demand rebounded quickly, borders were closed, and businesses struggled to find people, any people, to fill roles. The response was blunt but effective: raise wages, poach from competitors, hoard staff, and lock in workers with ever-higher pay packets. Wage growth accelerated, turnover surged, and labour costs became a central concern for businesses and policymakers alike.

Today’s environment looks different. Wages growth has settled into a steady pace, rising 3.4 per cent over the year even as the labour market remains tight, with unemployment holding at 4.1 per cent in January 2026. Full‑time jobs are growing, hours worked are rising, yet underemployment is also edging higher. Participation has eased from record highs, and younger workers in particular are finding it harder to secure the hours they want.

Furthermore public sector wages led in 4Q25, rising 4.0 per cent over the year, compared with 3.4 per cent in the private sector. This largely reflects the rollout of new enterprise agreements, many of which included backdated pay rises and scheduled increases later in the year. In other words, part of the strength is about timing and agreements already locked in, rather than a sudden lift in bargaining power across the economy. Wage gains were especially strong in healthcare and social assistance, helped by government‑funded initiatives in aged care and early childhood education.

Coming back to the labour market, low unemployment alongside rising underemployment, is a classic signal of structural rather than cyclical pressure. There are people available to work, but not always in the right roles, with the right skills, or in the right locations. Migration and new graduates have added to labour supply, but supply alone is not solving the problem. The constraint has shifted from how many workers to what those workers can do.

Having said that, monthly labour data are noisy. Its important to note that leave patterns vary year to year, seasonality can affect hours more than jobs, and composition effects can move full-time/part-time jobs growth around. Furthermore, the problem of structural unemployment is one that has been vocalised for a while now, which ultimately does feed into productivity challenges felt across Australia.

Beyond the Data: Conversations with Clients

Businesses are acutely aware of this shift, however what is interesting is their strategy. Our client interactions have highlighted on numerous occasions that rather than bidding up wages to attract external hires - a strategy that made sense when labour was scarce across the board, firms are becoming more selective. The data reflect this: employment growth has been modest, but hours worked have increased faster than headcount, suggesting firms are meeting demand by leaning more heavily on existing staff. Full‑time employment has risen strongly, while part‑time roles have declined, pointing to a focus on core workers rather than broad-based hiring.

On the ground, this shows up as a growing emphasis on upskilling and internal mobility. Faced with persistent skills mismatches, our clients are increasingly choosing to invest in their existing workforce to offset risks of an external market that may not deliver the capabilities they need. Training budgets are being redirected, career pathways are being formalised, and roles are being redesigned to better fit the skills firms already have. In effect, businesses are trying to build the labour they need, not just buy it - keeping all their options open.

This shift also helps explain why wages are no longer accelerating. When firms compete aggressively for the same scarce talent, wages rise quickly. But when the constraint is skills, not people, higher wages alone don’t solve the problem. Perhaps that is why we are seeing wage growth becoming more anchored, supported by enterprise agreements and policy-driven sectors like healthcare and education, rather than by economy-wide bidding wars.

Geography adds another layer to the story. In regional areas, many of our clients view migration positively, not as a threat to local jobs but as a solution to long‑standing workforce gaps. According to business leaders that we have spoken to, migrants are often more willing to settle regionally, particularly when doing so supports pathways to residency, while younger local workers tend to gravitate toward capital cities in search of broader opportunities. This has made migration an important part of addressing structural shortages in regional labour markets, even as overall labour supply increases nationally.

What this underscores is that the reality sits between the extremes: low unemployment does not mean the labour market is overheating, just as rising underemployment does not signal a sharp downturn. The market is still tight, but it is tightening in different places and loosening in others. Businesses are not cutting back en masse, but they are becoming more cautious, more targeted, and more strategic in how they use labour.

For policymakers, this distinction is crucial. Structural unemployment does not respond neatly to interest rate changes. Higher rates won’t fix skills mismatches, just as lower rates won’t automatically unlock labour supply where the right capabilities are missing. That’s why the current mix of steady wages growth and a gradually cooling labour market is somewhat reassuring, even as it raises longer‑term questions about productivity, training, and workforce development.

Our clients have indicated to us that the era of solving labour problems by simply paying more is fading. The next phase is about investing in people, redesigning jobs, and adapting to a labour market where the challenge is not finding workers, but developing, and retaining the right ones.