Labour inflation fears easing as wage growth cools

In the final quarter of 2024, wage growth was its slowest since March 2022, according to data from the Australian Bureau of Statistics (ABS).

Data recorded by EmploymentHero found that annual wage growth was 4.3 per cent in January, in what it described as a “stark correction” to 8.8 per cent growth seen in August 2024.

“Businesses are trying to balance the high cost of operating with changing consumer behaviour in a cost-of-living crisis,” Ben Thompson, chief executive of EmploymentHero, said.

“This has led to a dynamic where although wages are still growing, hours are being axed to cope with expenses, particularly in sectors like retail.”

Cooling labour market data would be likely to bolster the RBA’s resolve to cut interest rates further, although global trade uncertainty could still confound the central bank’s appetite for future cuts.

According to EmploymentHero, the median hourly wage reached $41.20 in January 2025, and wage growth for full-time employees decreased notably to 3.3 per cent year on year, from 7 per cent in December 2024.

Average hours worked declined 6.1 per cent year on year in January, with casual roles seeing the largest drop in hours at 27.2 per cent, according to EmploymentHero.

“With a spike in casual work driving employment growth, it’s likely poly-employment is on the rise, where Australians need to work multiple jobs to make ends meet,” Thompson said.

In its statement following its February interest rate decision, the Reserve Bank warned that the economy faces significant uncertainties, citing a tight labour market as a risk factor.

Despite easing wage growth, the central bank noted that the labour market still appeared tight, with labour underutilisation measures declining and availability of labour remaining a constraint for employers.

However, if the labour market eases further and unemployment begins to climb, this will likely signal the RBA to loosen monetary policy.

The seasonally adjusted unemployment rate rose by 0.1 percentage point to 4.1 per cent in January, according to ABS data.

The fact that inflation has declined while unemployment has remained low has led some economists to question the RBA’s assumption that unemployment below 4.5 per will stoke an unsustainable level of inflation.

“The RBA made a noteworthy change when updating its forecast today, reducing expected medium-term unemployment from 4.5 per cent to 4.2 percent,” Anders Magnusson, BDO Economics partner, said.

“This suggests that the RBA has lowered its view of a sustainable non-inflationary unemployment rate. This is a win for the RBA and workers as maintaining full employment in the medium term is in the RBA’s mandate and we can now expect that situation to be more beneficial to workers.“

The central bank is staying alert to unemployment measures, admitting that there is a risk that they are over-estimating the tightness of the labour market.

“We judge that the labour market will likely still be operating above capacity over the next couple of years, though there is considerable uncertainty around this assessment,” said the RBA in its February statement on monetary policy.

“A key risk we explore in detail is that we are over-estimating the degree of tightness in the labour market or that economic activity does not pick up as much from here, in which case inflation will fall more quickly than forecast. While we do not view this as a central scenario, we remain alert to the possibility.”