BCEC Monthly Labour Market Update – January 2026

• Unemployment rate holds steady at 4.1 per cent.
• Odds firm for a further hike in interest rates in the first half of 2026.
• Real wages likely to continue to fall over 2026.

Catch 22 in wages data

The January labour force survey results provided a relatively uneventful start to 2026. The unemployment rate remained at 4.1 per cent as employment grew by a modest 17,800 people. The participation rate remained unchanged and there was a small fall in the number of unemployed. While the aggregate increase in jobs was below trend, it was the result of a healthy 50,500 jump in full-time positions offset by a 32,700 contraction in part-time jobs.

With employment numbers holding steady, wages data released on the previous day had greater implications for the inflation and interest rates outlook. Based on the wage price index (WPI), real wages fell by 0.2 per cent over the year to the December quarter, as annual inflation of 3.6 per cent exceeded the 3.4 per cent increase in wages.

The Reserve Bank of Australia’s (RBA’s) forecast for the annual increase in the WPI to the December quarter turned out to be spot on. Workers will be hoping their forecasting accuracy doesn’t continue. The RBA’s projections are for annual increases in WPI of 3.1 per cent to both the June and December quarters, but for CPI to hit 4.2 per cent in the June quarter, easing to 3.6 per cent in the December quarter. That would mean continued and substantial erosion of real wages through calendar year 2026.

It’s a classic ‘Catch 22’ for Federal Treasurer Jim Chalmers. He’s repeatedly spruiked that real wages are moving again under the current government. In fact, based on the WPI measure, real wages remain around 1 per cent lower than when Labor came to office, and have yet to rise above their level in the June quarter of 2022, the quarter in which the government was elected.

The immediate headache for the government is the spectre of inflation fuelling a hike in interest rates. In the absence of labour productivity growth, wages growing faster than prices will only add to inflationary pressures.

Much of the increase in the December quarter’s WPI was due to wage rises in the public sector – notably for State government employees and in health care and social assistance. Productivity gains are unlikely to bridge the gap for those workers. It’s not that those sectors don’t see productivity gains, we just aren’t very good at measuring them. Wage growth in health care and social assistance has been largely driven by pay equity considerations in award determinations, notably addressing low wages in the aged care sector – and rightfully so – rather than in response to rising productivity.

The RBA’s most recent projections, released earlier this month are for the unemployment rate to rise to 4.3 per cent in this first quarter of 2026, up from 4.2 per cent last quarter. The most telling figure from the January labour force survey might just be the otherwise unremarkable 0.1ppt decline in the trend estimate of the unemployment rate to 4.1 per cent in January.
That, combined with the latest WPI figures, only increases the chances of a further rate rise coming sooner rather than later… and that’s without any real wage growth.

Unemployment plummets in the West

While changes in the labour force figures for January were relatively muted, the unemployment rate in Western Australia fell by a suspiciously large 0.5ppt to 3.4 per cent. That’s the lowest rate recorded since late 2024 and compares to unemployment rates of 3.7 per cent in SA and over 4 per cent in all other states and territories.

The fall in the WA unemployment rate is largely attributable to an even more dramatic fall in the male participation rate, from 74.3 per cent to 73 per cent. There was actually a slight fall in employment, and the female participation rate edged up 0.1ppt to 63.7 per cent. The drop in the unemployment rate was most pronounced for men (down 0.6ppt to 3.5 per cent), but women also saw a significant fall (down 0.5ppt to 3.2 per cent) on the back of increased female employment.

Often, we’d put changes of this ilk down to statistical variability and anticipate at least a partial reversal next month. However, WA’s overall participation rate in December was just 0.1ppt below the trend estimate and remains the highest of the six states. WA also saw the largest jump in nominal wages in the December quarter WPI (up 4.1 per cent for the year) and vacancies have grown strongly in each of the past three months. Statistical noise aside, there are grounds to believe the WA labour market may well be tightening.