Trend unemployment edges down to 4.1%, strengthening case for another RBA rate increase

Australia’s labour market strengthened in January, with employment growing faster than the increase in people available to work. 

Employment increased by 17,800 positions over the month, building on a strong December result and pointing to a labour market that remains slightly tighter than the Reserve Bank of Australia (RBA) would prefer. 

From an employer’s point of view, a ‘tight’ labour market means a smaller pool of workers available to hire, increasing the chance of larger wage rises as businesses compete to attract the people they need. Those rises can add to inflation and make it more likely the RBA lifts the official interest rate to bring it under control. 

The trend unemployment rate, a smoother measure that strips out month‑to‑month noise to show the underlying direction, fell to 4.1 per cent, down from 4.2 per cent in December. 

These figures confirm that the labour market was regaining momentum at the end of 2025 and into early 2026,” Commonwealth Bank Senior Economist Ashwin Clarke said. 

“While the monthly gains in employment look modest, the underlying trend shows the labour market remains a little too tight to bring inflation back to the RBA’s target midpoint.”

A small fall in the participation rate also contributed to the lower unemployment rate. Participation in trend-adjusted terms has been easing since late 2024, down from a peak of 67.1 per cent, potentially reflecting a slight easing in cost-of-living pressures compared to the highs of 2022 and 2023. 

Trend employment rose by 24,700 in January, while the trend underemployment rate held steady at 5.9 per cent, close to its lowest level in three decades. 

The data predates February’s 25‑basis‑point rate increase but is unlikely to reassure the RBA. The continued strength in hiring suggests monetary policy may still need to do more work to contain inflation. 

Public sector wages growing 

The labour market figures follow the release of the Wage Price Index, which showed wages growth holding up at 0.8 per cent in the December quarter and 3.4 per cent over the year. Much of the strength came from the public sector, where wages rose by 4.0 per cent through 2025 compared to 3.4 per cent in the private sector.  

CBA economists said the figures suggest the labour market is in a solid place after gradually weakening, but it is still a little stronger than the level the RBA sees as “full employment”.  

Next week’s private investment data will offer a clearer picture of momentum in the real economy at the end of 2025, helping gauge how much additional tightening may be required. 

See Ashwin Clarke’s full report HERE.