Australian Industry Group Research & EconomicsSeptember 202615 interactive charts
Key labour market developments
Australia’s labour market in 2026: Performance and outlook
01
The labour market eased slightly in 2025-26 – vacancies, utilisation rates, wages growth and hiring difficulties all softened, delivering some relief for employers
02
But it remains very tight – employment generation accelerated and labour market indicators are still near their strongest levels since the 1980s
03
Policy is driving outcomes – changes to employment regulation and FWC decisions are driving stronger outcomes than economic conditions warrant
04
The labour market is becoming less flexible – with rising oncosts, falling mobility and workforce ageing posing longer-term structural challenges for employers
05
The outlook for employers is mixed – global developments will materially slow the economy in 2026-27, but this will offer some further relief in terms of labour supply pressures
Key labour market data
In mid-2026, Australia’s labour market featured:
4.5%
Unemployment rate
Normal: 5.5%
2.4%
Employment growth
Normal: 1.6%
2.0%
Job vacancy rate
Normal: 1.3%
3.2%
Wages growth p.a.
Normal: 2.7%
-0.2%
Productivity growth p.a.
Normal: 1.1%
45%
Hiring difficulties rate
Normal: N/A
7.2%
Job turnover rate
Normal: 9.4%
28.1%
Work from home rate
Normal: N/A
16.2%
Employment oncosts
Normal: 13.9%
Normal refers to average rates in decade pre-pandemic
Fuel shortages averted, but soaring prices causing pain
The US-Iran War has caused significant economic difficulties for Australia’s economy and energy-intensive industries.
The conflict has closed the Strait of Hormuz to shipping, which has trapped around a fifth of world oil and gas supplies in the Middle East.
Many governments have released emergency reserves to cover the shortfall but a supply gap remains, putting pressure on markets.
Australia has avoided overall fuel shortages but still had to contend with significant price rises.
Local fuel prices doubled in the March, then softened when the federal government halved fuel excise from April to July.
Prices have since oscillated with political developments and will continue to show volatility until a durable settlement is reached. Australian fuel prices remain 50% higher than pre-conflict levels.
This has put considerable cost pressure on fuel-intensive parts of the economy, including transport, manufacturing and construction.
It has also raised cost-of-living pressures that since Easter have weakened consumer confidence and household spending.
Entrenched inflation as economy hits its productive limits
The energy crisis has exacerbated a pre-existing inflation problem which is contributing to the weak outlook for the Australian economy.
In the months following the Middle East conflict, inflation jumped from the mid-3s to mid-4s as the price of fuel and fuel-intensive products surged. CPI should normally be within the 2-3% band.
This is not solely due to the energy crisis. Measures of inflation which exclude fuel – such as the Trimmed Mean – have also risen, pointing to broad-based inflationary pressures.
This is because of Australia’s poor productivity, which leads to an uptick in inflation whenever economic growth exceeds 2%.
High inflation forces the Reserve Bank to maintain higher interest rates, which suppress inflation but slow economic activity. Current forecasts indicate this will required throughout the 2026-27 financial year.
This combination of high inflation and low growth puts pressure on business margins, as many industries cannot fully pass on rising costs in subdued economic conditions.
It also raises wages growth for industries and occupations where industrial instruments (awards or EBAs) link wages to inflation.
Datacentres booming but other industries pull back
Business investment in Australia is moving at two very different speeds, with datacentres surging while other industry slows.
Australia has experienced a boom in datacentre construction since 2025, as developers rush to establish projects that will serve the emerging market for AI-driven datacentre services.
Capex in the ICT industry has risen by around $5 billion per quarter. Half of total investment growth in 2026-27 was datacentre associated.
More datacentre investment is to come, with 9GW of further projects currently awaiting connection to the grid.
Elsewhere investment has been subdued. Growth has been volatile as the economy has slowed and uncertainty inhibits investment decisions.
Datacentre builds are not a durable investment foundation – they rely heavily on imported components, generate limited employment, and only provide spillovers to a narrow range of tech-related industries.
We are likely to see a two-speed investment dynamic over the coming year, with strong growth in ICT-related areas alongside slower outcomes in industrial and consumer sectors.
Employment-intensive industries struggle since pandemic
Australia’s productivity has been especially poor since the pandemic. The economy has delivered zero overall productivity growth since 2019. It had previously grown by 1.2% per year.
But within this overall stagnation lies two different dynamics:
More tech-intensive industries have seen strong productivity growth of between 1% to 5% per year.
More employment-intensive industries have seen productivity go backwards at a rate of around 1% to 2% per year.
These employment-intensive industries have struggled with a combination of increasing regulation, rising wages and oncosts, and reduced flexibility over the last five years.
In some industries – such as consumer services, care and construction – it is harder to deploy productivity-enhancing technologies due to regulatory barriers.
Lifting productivity growth requires tackling the challenges inhibiting tech investment in employment-intensive industries.
Australia’s labour market has yet to adjust to economic conditions and remains very tight by historical standards.
The unemployment rate fell to 3.5% during the post-pandemic boom, but since crept upwards to 4.5% as the economy has normalised.
Under-employment – where job-holders work fewer than desired hours – has followed a similar pattern and currently sits at 6.5%.
The last four years has seen the tightest labour market in a generation. It has not been this strong since the mid-1980s.
The labour market is expected to remain very tight over 2026-27, with the unemployment rate forecast to marginally increase to 4.6%.
Weaker economic growth over the last two years has not seen the labour market return to balance, breaking a pattern where employment moves with broader economic conditions.
This is due to strong jobs growth in government-supported industries, an overhang of excess vacancies, and ongoing recruitment difficulties for skilled roles.
The government-funded jobs boom slows, but what comes next?
The government funded jobs has slowed, with the private sector re-emerging as
In 2023 and 2024, there was a rapid increase in employment in three industries: healthcare, education and the public sector.
This was due to increasing state and federal government spending on care, education and other public services.
74% of all job creation in 2023 and 2024 was in government-funded sectors, despite these industries accounting for only a third of all jobs.
Since 2025, economic recovery has seen the private sector employment increased, accounting for 70% of all job creation.
This is due to strong employment growth in the construction, transport and professional services industries. All have benefited from growing datacentre activity and/or house building over the last year.
With the private sector economy set to slow, and government-funded jobs growth normalising, employment creation is likely to fall over the coming year. This will offer further relief for employers facing labour supply constraints.
Remain stubbornly high as labour demand exceeds supply
A corollary of the tight labour market is an excess of job vacancies, which continues to remain stubbornly high.
Job vacancies surged during the post-pandemic boom, with almost 250,000 vacancies above normal levels emerging. Many were cleared as the economy returned to normal.
However, around 70,000 excess vacancies have persisted since 2024, pointing to an ongoing pattern of labour demand exceeding the available supply.
2.0% of jobs in Australia are currently vacant, compared to a normal level of around 1.3%.
Vacancy rates are especially high in healthcare (2.2%), professional services (2.5%), administrative services (2.7%) and accommodation & food (2.7%).
This vacancies overhang continues to prevent the labour market from rebalancing. Employers will shed vacancies before shedding staff, while job-seekers can more easily find new work.
Inflation and FWC decisions keep wages growth high
Wages growth has eased only slightly over the last year, with inflation and FWC decisions maintaining pressure on employers.
Wages grew by 3.2% over 2025-26, down slightly on the 3.4% a year prior. It is being held up by several factors:
High and persistent inflation, which has seen employers offer higher than normal wage increases across all industrial instruments
The FWC wage decision of 3.5% in 2025, which impacted the roughly 20% of employees paid under award instruments
Higher bargaining outcomes in the recent cycle, which saw enterprise agreement wages rise by 3.6% over the last year.
Market-based (i.e. individual arrangement) wages are growing much more slowly at 2.8%. This reflects the impact of recent FWC decisions that have exceeded underlying wage growth.
Overall wages growth of 3.3% is forecast for 2026-27 by the RBA. However, the 4.75% FWC decision in 2026 will see award wages grow far more strongly and is likely to increase bargaining outcomes.
The very tight labour market has also seen recruitment become much more difficult – particularly for high skilled roles.
Hiring challenges peaked just after the pandemic, when 70% of employers reported difficulties completing recruitments.
As the economy has normalised the rate has eased back and now sits at 45% in mid-2026.
However, skilled roles with a technical basis – equipment operators and technicians & trades – remain much harder to fill.
This reflects strong demand for technical roles, alongside barriers to entry for new employees such as complex training pipelines and occupational licensing systems.
Non-technical roles are much easier to fill. This includes professional roles, which after two years of high difficult recruitment have now returned to the average rate.
Industrial employers with need for technical skills should expect difficult hiring conditions to persist into the next year.
In addition to wage pressures, employers have had to confront mounting employment oncosts due to regulatory changes.
Regulatory oncosts have historically been around 14% of wages in Australia. But since the pandemic they have jumped to 16%.
Three factors have driven the rise in regulatory oncosts:
Statutory increases in the Superannuation Guarantee from 9.5% to 12.0% over five years
Increases in workers’ compensation premiums due to rising psychosocial injury claims
Increasing payroll taxes with changed rules in several states
These have raised total employment costs in Australia by $21 billion relative to where they would have been if oncosts remained at 14%.
All industries have seen oncosts rise, but the impact is more pronounced in industrial sectors with complex safety and higher workers’ compensation costs.
Declining rates of job mobility – the rate at which employees change jobs – is also having an impact on the labour market.
Job mobility has been in secular decline for a generation, with rates falling from 17% p.a. in the 1970s to 7% p.a. last year.
Population ageing accounts for much of the shift, as older workers change jobs less often. As the workforce ages, this leads to a lower overall mobility rate.
But mobility has also declined within every age bracket, especially for younger employees. This points to a lower underlying tendency for employees to change jobs separate to the ageing effect.
It remains a demographic puzzle why mobility is declining. Potential factors include changes to IR systems, new frictions in the labour market, growing social conservatism and even rising house prices.
Falling mobility negatively impacts on the labour market. It increases recruitment difficulties, exacerbates skills shortages and reduces productivity performance.
Working from home (WFH) is touted as one of the largest changes in the workplace in decades. But the data tells a different story.
According to the most reliable (ABS) surveys, 28% of Australian employees worked from home at least some of the time in 2024.
One- or two-day is the dominant WFH pattern, with longer durations comparatively rare outside ICT employees.
WFH patterns are almost entirely determined by occupation. White collar office professionals have the highest rates – usually 40-60% range – reflecting the relative ease of extending access.
Clerical and technical service occupations have rates in the 10-20% range, while WFH is negligible for frontline service roles. This reflects the inherent need for physical presence in these occupations.
This data indicates that functional practicalities drive WFH adoption – those occupations which can already have high rates, and those which cannot have negligible rates.
Around three quarters of employees do not utilise WFH. Policy changes – either at the employer or legislative levels – are unlikely to materially change WFH practices.
Australia’s workforce is steadily ageing. In 1991, employees over 50 contributed 16% of the labour supply, but by 2026 their share had almost doubled to 29%.
The largest increases have come from employees over the age of 60, whose labour market participation has surged. Several factors have contributed to workforce ageing:
Later retirements, particularly amongst women who increasing stay in the labour market beyond the age of 60
A fall in the share of physically-demanding jobs, which typically see earlier labour market exits due to health considerations
Increased part-time and flexible work, which allows older employees to stay engaged in the labour market for longer
Workforce ageing poses new challengers for employers.
Around 6% of the labour force is expected to retire in the next five years, requiring more attention to succession strategies.
Demand for flexible work – including transition to retirement arrangements – is also increasing with workforce ageing.
The importance of migrants to the economy has increased in recent years, but policy change makes the future uncertain.
Recent migrants – those who arrived in the last five years – currently make up 5.7% of the Australian workforce. Ten years ago the figure was 4.4%.
They play an outsized role in three migrant-intensive industries: accommodation & food, administrative services, and health and social care.
These three industries initially absorb a large proportion of Australia’s migrants, and rely on them to fill workforce gaps. They have also seen their migrant reliance grow significantly over the last decade.
Flagged changes to Australia’s migration settings will have potentially major impacts on these industries, particularly for their near-term workforce needs.
It may also have impacts for lower-utilising industries which rely on migrants to fill critical skills gaps, such as specialised roles in the construction, manufacturing and ICT sectors.
Dr Jeffrey Wilson is Head of Research and Economics at Australian Industry Group. He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
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