Unemployment rate holds at 4.1%

The unemployment rate in Australia was 4.1% in January (in seasonally adjusted terms) for the second successive month, back down where it was in 2025 before the May and August cash rate cuts.

There were 18,000 more employed Australians by the end of January compared to December, with 50,000 more Australians in full-time work, partly offset by a fall in part-time employment.  

Underemployment rose slightly, pushing underutilisation (which captures both unemployment and underemployment to measure what portion of the available labour isn't being used) to 10%, up from 9.8% in December.

However, that's still lower than in much of 2025, and remains well below pre-covid levels - the last time pre-pandemic the underutilisation rate was below 13% was May 2013.

RBA messaging has been consistent that it considers the labour market tight and potentially inflationary, so the January numbers will do little to dissuade the popular expectation there will be more cash rate increases to come.

Last week, Assistant Governor Sarah Hunter affirmed there is "a bit too much pressure" in the labour market and suggested the current unemployment rate is below "full employment" - the highest employment rate consistent with stable inflation.

"Our full employment and inflation objectives are entwined and the data is painting a complementary picture with a bit too much pressure on both sides," Ms Hunter said.

Will February rate hike increase unemployment?

The minutes from the February meeting revealed the RBA decided that a cash rate of 3.60% was "no longer restrictive".

"The pick-up in inflation and steadying of conditions in the labour market...suggested that monetary policy was not restrictive overall," the Board agreed.

It was judged financial conditions need to be tighter to slow the economy, and the 25 bps hike would help to curb demand and bring the labour market closer to "full employment".

During the previous rate hiking cycle, the unemployment rate did slowly increase - from 3.4% in late 2022 to above 4% by 2024 - but there's generally a lag between when rates are increased and when the economy starts to respond so history suggests there won't be a dramatic change in the unemployment rate over the next couple of months.

Is traditional view of unemployment outdated?

For many Australians it may seem a little perverse that part of the transmission of restrictive monetary policy is often for unemployment to increase.

The traditional view is there tends to be an inverse relationship between unemployment and inflation - more people in work means greater aggregate demand, which can put upwards pressure on prices.

Part of the balancing act of the RBA is to keep employment as high as possible while also keeping inflation under control, which is why it historically has referred to the Non-Accelerating Inflation Rate of Unemployment or NAIRU (the lowest unemployment can be without accelerating the inflation rate).

Estimates of the NAIRU change over time, but many economists feel the number would be above the current 4.1%.

However, Ms Hunter said last week that the 'non-accelerating' part of the NAIRU name is "a bit out of date".

"When the labour market is tighter...than full employment on an ongoing basis, underlying inflation will hold above...target, but not necessarily accelerate away from it," she said.

That might suggest that moving forward the Board may have a higher tolerance for low unemployment than it has in the past, although for now it still appears it considers the labour market a little too tight.