Government-backed jobs boom running out of steam: economists

A slowdown in government-backed hiring could drag on job growth, economists warn, as the economy recorded a surprise decline in employment in May.

Government aligned jobs growth has boomed in the past two years. Picture: NewsWire / John Appleyard

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Australia’s tight job market could soon take a turn for the worse, economists warn, as a government-supported hiring spree across the aged-care sector, the public service and the National Disability Insurance Scheme looks set to run out of steam.

The unemployment rate held steady at 4.1 per cent in May, the Australian Bureau of Statistics said on Thursday, even as the figures showed 2500 people lost work. That decline defied expectations for an employment increase of 21,200.

Despite the weaker-than-­expected result, economists said the latest figures were unlikely to shake the Reserve Bank’s view that the labour market remained robust, with its attention instead turning to the global volatility sparked by Donald Trump’s tariff war and the Israel-Iran conflict.

Citi economist Faraz Syed said: “There is … no rush, at least from the labour market data, for the RBA to announce back-to-back rate cuts.”

He said he expected the central bank to hold rates steady at 3.85 per cent at its next meeting, slated for July 7-8.

Jim Chalmers lauded the data, arguing that the strong jobs ­market would help Australia weather international uncertainty.

“Low unemployment and much lower inflation is a remarkable combination and means we are well placed and well prepared for the challenges coming at us from around the world,” the Treasurer said.

Other indicators contained in the latest data also pointed to a ­resilient labour market. The participation rate – which measures the share of the working-aged population in a job or in search of one – fell slightly to 67 per cent, a near-record high.

And even though employment declined, the surprise fall was wholly driven by a reduction in less secure part-time positions, which slumped by 41,100. Full-time employment, which is considered by economists to be more stable, grew by 38,700.

Queensland recorded the lowest unemployment rate of any state or territory at 3.7 per cent – as well as the widest gap between the state’s figure and the national percentage since 2009.

Following the fresh jobs reading, bond traders trimmed their rate cut bets, tipping a 76 per cent chance of a quarter-percentage-point rate cut in July, a move that would take the official cash rate to 3.6 per cent.

While the RBA currently ­believes the job market is beyond so-called “full employment” and a source of inflation, governor ­Michele Bullock signalled last month that the central bank was mulling whether Australia’s low unemployment rate might be ­sustainable.

“We’re open to having a debate about this,” Ms Bullock told ­reporters.

“Ultimately, the evidence will bear it out, and at the moment it does seem that inflation is continuing to come down, notwithstanding a bit of tightness in the ­labour market.”

In updated quarterly forecasts released in May, the RBA’s economists projected the unemployment rate would edge higher, peaking at 4.3 per cent by year’s end. But that figure is still below its estimate of full employment at roughly 4.5 per cent.

Australia’s labour market has remained resilient even as economic growth remained sluggish at the start of the year – a disconnect NAB senior economist Taylor Nugent attributed to a “high share of government hiring in the post-pandemic period”.

Roughly 80 per cent of all jobs filled in the past two years have been in the so-called non-market sector – covering the public service, education sector and the care economy – where roles are either created directly by government or heavily subsidised by the ­taxpayer.

But KPMG chief economist Brendan Rynne warned there were tentative signs that the government-backed jobs boom, which had helped support overall employment growth, was set to slow “sooner rather than later”.

“The private sector is not strong enough to take up the jobs growth momentum due to underlying weakness in economic conditions,” Dr Rynne said, making the upcoming RBA decision ­increasingly important.

“The March quarter national accounts showed the thinness in our economy. A pull-back in ­government spending and external market gyrations wiped half the growth expectation for the quarter.”

Separate jobs data released earlier this month showed that roles filled in the non-market sector fell by 0.3 per cent during the March quarter – the first drop in four years – while private sector employment remained flat.