December Labour Force: strong finish to the year
Employment: +65.2k (from –28.7k). Unemployment Rate: 4.1% (from 4.3%). Participation Rate: 66.7% (from 66.6%).
Click here for: Westpac Chart Pack – December Labour Force (PDF 1MB)
In December, employment growth was firmer than expected, lifting +65.2k (+0.4%). This was much higher than the consensus forecast (+27k), and even Westpac’s above-market forecast (+40k). On a three-month average basis, employment growth has stabilised around 1.2%yr, much softer compared to a year ago (2.2%yr) and the historical average (1.9%yr). Downward revisions to population growth (discussed in more detail below) have seen employment growth also get revised down over the course of this year. Unaffected by this, the employment-to-population ratio, at 64.0%, is still around 0.4ppts lower compared to last year.
The main source of the surprise, though, was labour force participation. After a surprising fall from 66.9% to 66.6% in November, we had expected a partial rebound in December. In the event, though, the lift in participation was much smaller, rising just 0.05ppt to round up to 66.7%. This combination of a stronger showing for labour demand and a more subdued lift in labour supply led to a decline in the unemployment rate, from 4.3% to 4.1%.
Taking the last few months together, it appears as though the gradual rise in the unemployment rate came to a halt late last year. On a quarter-average basis, the unemployment rate had risen incrementally from 4.0% in Q4 2024 to 4.3% in Q3 2025, before dipping back slightly to 4¼% in Q4 2025. The underemployment rate has been bumping around a bit more month-to-month recently, but it has held steady around 5.9% on a quarter-average basis over 2025. Ultimately, the signal from underemployment continues to speak more towards a ‘stable’ rather than ‘softening’ labour market.
Underneath these headline results, there were some interesting contrasts between youth (15–24-year-old) and adult (25 years +) cohorts. While youth unemployment fell from 10.0% to 9.1%, this was not explained by strong employment gains, but rather, a large decline in labour force participation. Meanwhile, the story for the adult cohort was almost the inverse: a strong rise in participation that was largely soaked up by labour demand, resulting in a solid lift in employment and a slight fall in the unemployment rate.
While we cannot rule out the possibility of that shifting seasonal patterns distorted the result, we do not think this was significant. Since the pandemic, labour force results have been known to be more volatile during summer months. The ABS has written on this topic before, particularly as it pertains to changes in leave-taking and the timing of some people starting/returning to work, but this appears to be more relevant for January/February rather than December. Shifting seasonality in spending patterns during the retail high season (Black Friday through to Boxing Day) could also be a factor, but this would typically boost part-time employment more than full-time employment, unlike the case this month (+10.4k vs. +54.8k respectively).
The December LFS clearly landed on the firmer side and the wash-up for the last few months suggests that the ‘gradual softening’ narrative, which characterised the bulk of last year, paused or completely halted. This leaves us with the question of whether further gradual softening is still on the cards in 2026. As we noted last year, now that jobs growth in the ‘care economy’ has largely normalised and there are early signs of a pick-up in market sector employment, we could be near or at the trough for jobs growth.
Looking forward, the trend for labour force participation will be key. Our baseline forecast is for growth in the labour force to outpace employment, leading to an incremental build-up of slack over this year. It may well be that this comes along in ‘fits and starts’, with the starting point for 2026 looking firmer than we had initially anticipated. The next couple of months of data will be crucial in confirming whether this is the case.
Today’s labour market reading comes against a backdrop of a strengthening consumer-led upswing and a lift in some components of inflation. Given this, the Monetary Policy Board are unlikely to waiver from a more hawkish perspective on the economy. But as far as the February policy decision is concerned, next week’s reading on inflation will again be the deciding factor.
Population Revisions
One point worth noting is that the current level of employment may be overstated due to how population is measured in the LFS. Official population estimates come with a significant lag of 6-9 months. So, for the LFS to produce current estimates of the employment level, the ABS uses population projections to fill in the gaps.
These projections require a number of assumptions from the lagged population data. The most critical component is net overseas migration, where the ABS uses patterns and volumes from overseas arrivals and departures (i.e. border crossings) data as a leading indicator. As discussed in the latest Population Statement (Box 2), border crossings data has significantly diverged from official population estimates recently. Specifically, estimates of ‘net permanent and long-term’ movements of temporary visa holders (the closest proxy to net migration) are more inflated than usual. This is due to a mismatch between interim border crossings for temporary visa holders over the course of their broader stay – departures verified as ‘short-term’, but arrivals indicated as ‘long-term’.
This upward bias has fed into the population projections in the LFS for some time. As a result, when the ABS scales its survey results to an ‘overestimate’ of the population frame, it is resulting in an overestimate of the employment level and growth as well. Fortunately, quarterly rebenchmarking to the latest official estimates of population ensures this bias does not grow over time, but we could be in store for more downward revisions to employment estimates so long as this dynamic persists. This means that focusing on ratio measures, like employment-to-population, can be more useful at times like these than employment growth.
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