Government stimulus obscures increasing weakness in private sector labour market

The Australian labour market appears to be defying the laws of economics. Despite the continuing slowdown in economic activity – real GDP growth was only 1.0% in the June quarter – the overall balance in the labour market has not yet shown signs of weakening.

The unemployment rate steadied at around 4.1% this year, up from 3.5% during the height of the post-pandemic boom. But this remains well below the normal range in Australia (5.0% to 6.0%), and at the very bottom of the range economists estimate to constitute ‘full employment’ (4.0% to 4.5%).

Indeed, the labour market added 64,000 new jobs in September alone – an astonishing figure given the backdrop of anaemic economic growth and slowing business investment.

How can this be? What’s propping up the labour market to keep it around full employment when business conditions are so weak? The answer lies in a divergence between two increasingly distinct labour markets.

Economists often split the Australian economy into two broad groups: the market and non-market sectors. The market sector comprises the majority of industries, which face normal market pressures on demand, investment and costs. The non-market sector comprises three industries – public administration, education & training and healthcare & social – where business conditions are heavily influenced by government spending and regulation.

When we separate the labour market into the market and non-market components, it becomes clear that the government-connected side is largely responsible for its paradoxical resilience over the last year.

Patterns of labour utilisation reveal this dynamic. In the year to the September quarter, labour use in the market sector was flat, as would be expected given weak economic conditions (Chart 1). However, labour use in the non-market sector grew by a very rapid 4.9%. All of the hours-basis employment generation over 2023-24 was generated in the non-market sector, particularly in healthcare and social services.

Had governments not radically stimulated employment in the non-market sector, unemployment would have risen and the labour market eased as expected over the last year.

This government stimulus has obscured the degree of weakness across private sector labour markets (Chart 2). Drilling down into industries reveals that the majority were shedding labour across the last year, with particularly large falls in accommodation & food, wholesale trade, and transport. In the market sector, only the (very small) administrative services industry shows any serious employment growth.

This pattern is repeated when we look at patterns of net job creation (Chart 3). Job creation in the private sector sputtered during 2023-24 financial year, falling to a lowly 0.2-0.4% per quarter. At the same time, the public sector job creation rate exploded, leaping to an all-time high of 2.3% in the June quarter of 2024 alone.

We also see the impact of government stimulus in wages dynamics (Chart 4). Market-based wages growth (i.e. individual arrangements) peaked in late 2022 and have since been slowing. But ‘regulated’ wages – awards and EBAs – have seen growth rates continue to accelerate to all-time highs. Regulated wages are far more common in the non-market sector, and in market industries which have a stronger connection to government spending (such as construction and utilities).

This points to a very different labour market outlook than that offered by simplistic analyses of the headline data. Overall employment and wages growth may still be strong, but only because government-linked employment has surged to counteract mounting weakness across the private sector.

If we net government stimulus out of the picture, the Australian labour market looks considerably more fragile than the low 4.1% unemployment rate seemingly implies.

Government stimulus cannot continue to fill the gap indefinitely. The non-market sector accounts for only for 29% of total labour use. Over the medium term, the employment base buttressed by government stimulus is simply too small to compensate for weakness across the rest of the market economy.

With the federal and state governments facing increasingly tight fiscal constraints, it is also unlikely they can continue to pump prime employment at the same rate in the budgets they will hand down next year.

Much therefore depends on whether economic growth improves over the next six months as forecast. If business conditions materially improve, the market sector may start generating employment again when government stimulus peters out. But if the market sector stays weak, the labour market may be about to slip off a government spending cliff. The next National Accounts, issued on December 4, will give a first indication either way.