November Jobs: Market Caution May Be Misplaced

Markets moved quickly to reprice RBA rate expectations after today's November labour force release. But in their rush to declare the economy sicker than we thought, they may be overlooking the bigger picture.

The labour market is cooling, but not enough to ease inflation pressure. In fact, once you adjust for participation and NAIRU dynamics, the labour market remains tighter than it appears - and inflation is re-broadening. Markets may be reacting to the wrong signal.

The Numbers That Spooked Markets

Employment fell 21,300 in November, well below consensus expectations of a 20,000 gain. Full-time jobs bore the brunt, dropping 57,000, while part-time employment provided only partial offset with a 35,000 increase. The employment-to-population ratio slid to 63.8%, its lowest since January 2024. Annual employment growth has decelerated to just 1.3%, down from around 3% at the start of the year.

Hours worked growth has slowed dramatically too. After tracking above 10% in early 2023, annual growth in hours worked has fallen to below 2%/year, now moving broadly in line with employment growth. The frenetic post-pandemic labour market is clearly normalising.

Perhaps most telling is the rise in male unemployment relative to female. The male unemployment rate has edged up to around 4.6%, while female unemployment sits closer to 4.0%. This divergence has preceded every major labour market slowdown since the early 1990s recession. When employers start pulling back, male-dominated industries like construction and manufacturing typically feel it first.

The Participation Puzzle

Here's where it gets interesting. The headline unemployment rate held steady at 4.3%, marginally better than the 4.4% consensus forecast. But this apparent resilience masks something important: people are leaving the labour force.

The participation rate dropped 0.2 percentage points to 66.7%, its lowest reading in over a year. The trend shows participation has been declining since peaking above 67% in early 2025. This is the classic late-cycle dynamic - as conditions soften, marginal participants (students who'd taken on extra shifts, retirees who'd returned to work) quietly exit, keeping the unemployment rate artificially low.

Markets seized on this as evidence the economy is weaker than it appears. Rate hike expectations, which had been firming through early December, were pulled forward - then pushed back - as traders weighed the competing narratives.

Why Market Caution May Be Misplaced

But here's what the dovish interpretation misses: it's the unemployment rate that measures labour market tightness, and at 4.3%, it remains below most estimates of the non-accelerating inflation rate of unemployment (NAIRU).

The RBA's published NAIRU estimate sits at 4.5%. Treasury puts it around 4.25%. Some market economists argue NAIRU could be as low as 3.5-4%, pointing to wage growth that has moderated without unemployment rising materially.

But there's a case to be made that these estimates are too optimistic. Joint estimation of NAIRU alongside the output gap - the approach used by the OECD and others - suggests the true NAIRU may be closer to 4.7%. If that's right, the labour market isn't just tight; it's significantly tighter than the RBA assumes.

Consider the historical pattern. Through the 1990s and early 2000s, the NAIRU sat around 6-7% - Australia ran substantial slack even at what looked like respectable unemployment rates. The mining boom, structural reforms, and immigration all helped push NAIRU lower over the following two decades, bottoming around 4.5% before the pandemic.

But the pandemic may have reversed some of that progress. Skill mismatches, changed work preferences, and reduced labour mobility have all been cited as factors that could have lifted the NAIRU. If it's now sitting closer to 4.7%, then an unemployment rate of 4.3% represents a labour market roughly 40 basis points tighter than equilibrium - not dissimilar to the pre-pandemic period when the RBA was cutting rates trying to generate inflation.

Yes, people are leaving the labour force. But from the RBA's perspective, what matters is whether there's enough slack to put downward pressure on wages and prices. And right now, there isn't - indeed, if the higher NAIRU estimate is correct, we may be further from equilibrium than the Bank realises.

The Elephant in the Room: Inflation

This brings us to the real story markets should be focused on: inflation.

Cast your eye across the various inflation measures and the picture is unambiguously ugly. After a promising decline through the first half of 2025 - headline CPI fell to around 2.1% by mid-year - virtually every measure has turned higher over the past six months. Trimmed mean, weighted median, headline - all trending in the wrong direction. Monthly headline CPI has jumped particularly sharply.

What's particularly concerning is the breadth. We're not seeing idiosyncratic price pressures in isolated categories. Both goods and services inflation are rising. Both tradables and non-tradables are elevated. This confluence is rare and troubling.

Goods inflation, which had fallen back toward the 2-3% target band after the supply-chain induced surge of 2022-23, is pushing higher again. Services inflation, which has been sticky throughout the cycle, shows no sign of easing. Non-tradables inflation - the domestically-determined prices most sensitive to local wage and demand conditions - remains well above target.

The NAIRU framework tells us this is exactly what we should expect. When the unemployment rate sits below the level consistent with stable inflation, price pressures build. And build they have. The inflation rate has pushed back above the 2-3% target band precisely as the unemployment rate has dipped below plausible NAIRU estimates. The theory is working as advertised - just not in the direction the doves would like.

What Markets Are Pricing

Against this backdrop, market pricing has swung dramatically. In early December, ASX rate trackers showed no fully anticipated rate hike on the horizon. Within a week, as inflation data accumulated and the RBA struck a hawkish tone at its December meeting, markets moved to price a rate hike by mid-2026.

But traders focusing on today's employment miss are in danger of missing the forest for the trees. One month of weak employment, partially explained by seasonal noise in the lead-up to summer holidays, doesn't fundamentally alter the inflation picture.

The Bottom Line

The labour market is softening - that much is clear. Employment growth is slowing. Participation is falling. The classic leading indicators of a downturn - rising youth unemployment, male unemployment overtaking female - are flashing amber.

But softening is not collapsing. The unemployment rate, at 4.3%, remains below the RBA's NAIRU estimate of 4.5% - and may be further below true equilibrium if NAIRU has drifted higher post-pandemic. Workers are leaving the labour force, but many were marginal participants who entered during the post-pandemic boom. The underlying tightness in the labour market persists.

More importantly, the inflation story hasn't changed. If anything, it's deteriorating. The simultaneous rise in goods and services inflation, in tradables and non-tradables, suggests price pressures are re-broadening rather than fading. The RBA's problem isn't a labour market that's too tight or too loose - it's an inflation process that refuses to stay in the bottle.

Today's jobs report will give the doves something to talk about. But until the unemployment rate pushes decisively above NAIRU - and until inflation shows sustained progress back toward the 2-3% target - the RBA has little room to ease. If anything, the risks still tilt the other way.

The market's caution on today's jobs report is understandable. But it might just be misplaced.