Unemployment has climbed to 4.6 per cent, yet Governor Michele Bullock still describes the labour market as "a little tight", and the reasons say a lot about how the RBA reads the data.

A rise in the unemployment rate from about 3.5 per cent to 4.6 per cent over a couple of years might suggest a jobs market with plenty of spare capacity. Yet when the Monetary Policy Board met on 28–29 September 2026, it raised the cash rate target by 25 basis points to 4.60 per cent, and the Governor told reporters that "the labour market remains a little tight."

That assessment can seem at odds with the direction of travel in unemployment. A closer look at the RBA's minutes, decision statement and media conference shows why the Board has not concluded that the labour market has become loose.

The case that conditions are easing

There is no dispute that the labour market has softened. The minutes record that unemployment rose to 4.6 per cent in August. The Board's decision statement described labour market conditions as having eased broadly as expected.

The RBA's August 2026 forecasts also expected unemployment to keep drifting higher, from 4.4 per cent in June 2026 to 4.8 per cent by mid-2028. And when members weighed the case for leaving rates unchanged in September, the minutes show they considered downside risks to activity and employment, alongside the lagged effects of earlier tightening and a larger-than-expected effect of falling housing prices.

Other parts of the economy have also softened. The Board's statement noted that output growth had slowed, though it was stronger than expected in the June quarter, that consumer spending was easing gradually, and that housing prices had fallen in most capital cities. The August forecasts, finalised before the September decision, also assumed a cash rate path that never exceeded 4.5 per cent, below the current 4.60 per cent setting.

So the Board is not ignoring the rise in unemployment. The question is how much spare capacity that rise actually represents.

Reason one: still low by historical standards

Bullock's first point was about perspective. At her media conference she said that "the unemployment rate is still quite low historically". She noted that more than one million jobs had been created over the couple of years in which unemployment moved from about 3.5 per cent to 4.6 per cent.

A labour market can ease from very tight conditions without becoming loose. Moving away from an unusually low unemployment rate is different from arriving at a point where job seekers substantially outnumber available roles. The Governor's description suggests the RBA sees the market as somewhere in between: softer than it was, but not yet in balance.

Reason two: what sits behind the 4.6 per cent

The second consideration is what drove the latest rise. The minutes note that the increase in unemployment in August came alongside a rise in participation. When more people enter the labour force to look for work, the unemployment rate can rise even if employers are still hiring.

The minutes also point to other signals that complicate a simple reading of the headline rate:

  • Most leading indicators pointed to stable labour demand.
  • Some job advertisement measures were strengthening slightly.
  • Members cautioned about interpreting the labour force data because of changes to survey methodology.

The participation point is easy to overlook. A higher unemployment rate driven partly by more people looking for work is different in character from one driven by employers shedding staff, even if the headline number is the same. Taken together, these signals suggest that demand for workers had not fallen away, and that the Board was wary of drawing strong conclusions from a single survey reading.

Reason three: cost and capacity pressures

The third reason lies in what the RBA sees happening to costs and prices. The minutes say unit labour cost growth was above what is consistent with the inflation target, driven mainly by subdued productivity growth rather than strong nominal wages. In other words, the labour cost of producing each unit of output is still rising too quickly.

Bullock linked inflation directly to these pressures: "Inflation is too high and has been driven by domestic capacity pressures." She also said: "The AI boom is also adding to demand in the Australian economy at a time when we already have capacity pressures."

The minutes back this up. July inflation data were stronger than expected, particularly in market services, and staff judged the upside surprise more likely reflected domestic capacity pressures than the pass-through of Middle East cost shocks. Staff also expected higher underlying inflation in the September quarter than forecast in August.

Weak productivity sits at the heart of this. The August forecasts have labour productivity falling 0.5 per cent over the year to June 2026. Bullock summed it up: "The bottom line is that productivity is doing nothing." If each hour of work is not producing more, even moderate wage growth adds to cost pressures. A labour market that might look adequately supplied on a headcount basis can still be stretched in terms of what it can deliver.

The inflation figures reinforce the point. Headline CPI rose 4.0 per cent over the year to August 2026, and in the June quarter the trimmed mean measure of underlying inflation was 3.6 per cent. Both are above the 2–3 per cent target, which has a midpoint of 2.5 per cent.

The bottom line

Unemployment has risen, and the RBA's August forecasts expected it to rise a little further. But the picture in the Bank's published material is of a labour market that has eased while, in the Governor's words, remaining "a little tight". Unemployment is still low by historical standards, the latest rise came with higher participation, leading indicators point to stable demand, and unit labour costs are growing too fast for the inflation target. That combination helps explain why the Board raised the cash rate target to 4.60 per cent in September, while saying it "will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions." The next cash rate update is scheduled for 2.30 pm on 3 November 2026.