A Productivity Deadlock Is Hiding Beneath Jobs Data

A surprise uptick in Australia’s unemployment rate has eased the prospect of further interest rate rises, while also forcing the spotlight onto a productivity crisis that is stifling small and medium business growth.

The Australian Bureau of Statistics has revealed Australia’s unemployment rate edged up by 0.1 per cent in July to 4.5 per cent, the equal highest figure since the pandemic. The result defied the expectations of economists who had predicted the rate would remain steady.

The softening of the labour market, coupled with new data on wage increases, signals the economy is slowing as the Reserve Bank intended, as it continues to rein in inflation. But productivity also remains low, leaving small and medium businesses with a capacity crunch.

“Business expansion has plateaued,” says Ben Thompson, CEO and Co-founder of Employment Hero. “The story behind this hiring caution isn’t a lack of ambition, it’s a persistent productivity deadlock.”

What The Numbers Reveal About A Cooling Labour Market

While some economists have interpreted July’s unemployment figure as a sign the labour market is cooling more quickly than expected, others argue it reflects a gradual and orderly loosening rather than a downturn.

The figures show a 16,000-person fall in employment, while the number of unemployed has risen by 4,000. The number of men in employment has fallen by 11,000. Among women, 22,000 fewer are employed in part-time roles but this is largely canceled out by a 17,000-strong jump in full-time employment.

Both the participation rate and the employment-to-population ratio have slipped 0.2 per cent. There is also a large dip in the number of hours worked, down 0.6 per cent. “There were 12 million less hours worked this month, with those employed full-time working 7 million less hours, and those employed part-time working 5 million less hours,” says ABS Head of Labour Statistics Sean Crick.

Western Australia and New South Wales have both seen their unemployment rates increase, while the number of employed people has grown in Queensland and Tasmania. South Australia has the lowest state unemployment rate, sitting at 4.1 per cent.

Wage And Jobs Data Point To An Interest Rate Reprieve

The Reserve Bank had previously forecast a national unemployment rate of 4.2 per cent by June, but more recently revised this to 4.8 per cent in June of 2028. It regards a loosening of the labour market as essential if it is to bring inflation into its target 2-3 per cent range.

This week’s Wage Price Index data is being seen as a further sign that inflationary pressures are easing. Wage growth is now sitting at 3.2 per cent annually, well below the 4.3 peak of late 2023 and broadly in line with inflation targets rather than ahead.

The higher unemployment rate and the Wage Price Index data have cemented expectations among economists that the Reserve Bank of Australia (RBA) will leave rates on hold at its September meeting, which would be welcome news for small and medium business owners fearing further hikes.

For SME employers, a cooler labour market means more candidates are available and existing staff are less inclined to look elsewhere. But by historic standards, an unemployment rate of 4.5 per cent is still considered low and, according to a KPMG report, hiring costs are expected to remain high.

This means for many small and medium businesses, expansion is likely to remain out of reach unless productivity improves.

Productivity Is The Real Bottleneck For SMEs

Ben Thompson says Australian labour productivity, measured by GDP per hour worked, has stagnated, growing at just ~0.7 per cent annually in recent years. “Businesses simply cannot accelerate hiring or increase wages sustainably without a corresponding rise in output per head,” Thompson says.

He argues that the productivity deadlock hits small and medium businesses hardest. “Australian SMEs currently operate at just 53 per cent of the productivity level of large firms,” he explains. “McKinsey estimates that closing this productivity gap could unlock a 3.7 per cent boost to national GDP.”

While recognising the challenging economic environment in which small and medium businesses have been operating, Thompson says owners are being denied time to develop long-term strategies. “Red tape and compliance act as a direct tax on SME productivity, pulling operators away from core operations,” he laments.

Thompson says the most effective method for boosting productivity for many small and medium businesses would be to embrace artificial intelligence. A recent Employment Hero SME Pulse survey of business leaders found 11 per cent were not using AI in their businesses at all. This rises to 22 per cent for businesses with fewer than 21 employees. 37 per cent were not planning to increase investment in the groundbreaking technology.

“Rather than viewing AI as a source of job disruption, SMEs should embrace it as a force multiplier, automating repetitive administrative drag and giving existing teams the capacity to drive real economic expansion,” Thompson says.