The Australian labour market is currently experiencing what economists refer to as a “full employment” cycle, where unemployment sits at historically low levels of around 4–4.5%. Although a low unemployment rate is generally seen as a sign of a stable economy, it can create challenges for businesses when it comes to attracting and keeping talented workers.

The Link Between Full Employment and Inflation

The Reserve Bank of Australia (RBA) has a long-standing position that full employment is a central goal of monetary policy, along with price stability. However, full employment contributes significantly to inflation. Tight labour markets increase pressure on businesses to raise wages to attract and retain talent. These higher wages often lead to increased consumer spending, which drives up prices across the economy.

As highlighted in the RBA’s recent Statement on Monetary Policy, the board “aims to achieve the maximum level of employment consistent with low and stable inflation” but does not set a fixed numerical target for full employment due to its changing nature. Instead, the RBA monitors a broad range of labour market indicators to assess economic conditions and inform interest rate decisions.

The Business Challenge: A Talent Shortage

For businesses, the reality of full employment means one thing: competition for skilled workers is fierce. The difficulty in recruiting and retaining skilled employees is hindering many companies’ productivity and growth potential. Business owners are experiencing challenges due to extended hiring processes, increased salary demands, and a limited pool of qualified candidates.

Unfortunately, this labour market pressure is not expected to ease anytime soon. Current projections indicate that these conditions will persist for at least the next 18 months, requiring businesses to rethink their recruitment strategies and workforce planning.

How Interest Rates Are Tied to Employment Trends

A tight labour market plays a significant role in the RBA’s decision-making process regarding interest rates. When unemployment is low and wages are rising, the RBA often steps in with higher interest rates to curb inflationary pressures. Conversely, if employment conditions were to soften, the central bank may consider easing monetary policy to support job creation.

For businesses, this means that interest rate fluctuations will continue to be a key factor in financial planning. Monitoring employment trends and Reserve Bank policy decisions is essential for businesses aiming to expand, secure funding or manage debt effectively.

Strategies for Businesses to Deal With Labour Market Pressures

To lessen workforce issues, companies need to create flexible strategies given the current state of employment. Here are some key approaches:

1. Improve the Benefits Offered to Employees

With job seekers having more bargaining power, companies need to offer more than just competitive salaries. A strong company culture, professional development opportunities, and work-life balance are essential to attract and retain talented employees.

2. Upskill and Reskill Your Workforce

Rather than relying solely on external hires, investing in training and upskilling programs can help bridge talent gaps within your organisation. Encouraging career progression from within can also foster employee loyalty.

3. Optimise Operational Efficiency

With talent shortages, businesses must focus on maximising productivity with existing staff. Leveraging technology, streamlining workflows, and improving internal processes can help maintain output despite workforce constraints.

Looking Ahead

The full employment cycle presents both opportunities and challenges for businesses. While a strong labour market reflects economic resilience, it also means increased costs and hiring difficulties. With these conditions expected to persist, strategic workforce planning will be essential.

Our team at Dillon Clyne offers real-time strategic thinking and financial advisory solutions to assist businesses in dealing with challenging economic climates. Our team of experts can provide guidance on workforce planning, capital management, and expansion strategies to support your business growth.

For tailored financial advice, get in touch with us today.