Australia’s jobs market has appeared resilient in the face of higher interest rates, but the latest analysis suggests conditions are weaker than they seem, with private employment fading.

Oxford Australia’s head of macroeconomic forecasting Sean Langcake says the apparent strength of the labour market recently has been “one of the ongoing puzzles” for economists.

That’s because unemployment typically rises in response to higher interest rates, which work to cool the economy by constraining consumer spending and, by extension, revenue for businesses.

But employment has actually increased by 389,000 (2.8 per cent) over the year to June, and although the jobless rate has risen, it’s still sitting near historic lows at just 4 per cent over June.

Private sector worry

The divergence makes it look like the jobs market is defying economic gravity, though Langcake says a closer look at the figures reveals far weaker conditions, particularly in the private sector.

In an analysis briefing he argues that the jobs market is actually being propped up by employment in the so-called “non-market sector” which encompasses industries like health care, social assistance, education and public administration.

These industries are somewhat separated from the business cycle and have been expanding rapidly in some places, particularly across the National Disability Insurance Scheme (NDIS).

“Four in every five jobs added over [the] year to Q1 [March quarter] were in the non-market sector,” Langcake said.

“In contrast, growth in labour demand for market sector roles has flatlined.

“If we expand our scope to consider both filled and vacant jobs, positions in the market sector are broadly unchanged since the start of 2023.”

Weakening jobs market

The revelations aren’t great news for workers in the private sector because they show that the jobs market is weakening and is unlikely to improve massively over the next two years.

“We expect non-market sector roles will continue to dominate employment growth in the near term,” Langcake said.

“There is a lack of a growth engine in the non-market sector at present. And with policy settings set to ease only slowly over the next two years, this malaise is likely to persist.”

Making matters worse, it’s likely that jobs growth in non-market industries tails off soon as well, with the NDIS currently the main factor driving employment growth.

NDIS stimulus

“The expansion of the NDIS is likely to keep supporting jobs growth in this space,” Langcake said.

“But the pace of growth will reach a plateau eventually and fiscal consolidation at the federal and state level is likely to put some downward pressure on hiring in public sector and education roles in the medium term.”

There are broader implications for the split between non-market and private sector jobs growth too, including for productivity growth, which the RBA has been watching closely since Covid.

That’s because there are implications for inflation if productivity fails to pick up while wages growth increases, with the RBA previously warning the path of interest rates might rely on this.

Productivity blow

Concentration of jobs growth in non-market industries will be a drag on productivity, Langcake said.

“[It] will exacerbate concerns over unit labour cost growth,” he explained.

“But, the weakness in market sector jobs growth will show the RBA that their efforts to cool the labour market are working in the sectors that are responsive to the business cycle.

“This may give them some pause against tightening further, lest they contribute to a larger overshoot in the unemployment rate.”