On the 19th of August, the Federal Treasurer will convene a three-day Economic Reform Roundtable to address Australia’s ailing productivity performance. A group of 25 leaders from government, business, unions and civil society – including the Australian Industry Group’s Innes Willox – will discuss policy reform options to improve the productivity, resilience and budget sustainability of the Australian economy.
It is well-known that Australia’s productivity performance is miserably poor. Economy-wide productivity barely increased last year, and since the pandemic has been growing at around half the rate prior to 2019. As productivity is the ultimate wellspring of national wealth, turning this crisis around is essential to achieve our economic and social aspirations.
In the public discussion leading up to the Treasurer’s Roundtable, the performance of the Australian labour market has been a notable blind spot. This is a worrying omission, given the obvious connections between how the economy creates and fills jobs, and how those jobs create output and value.
At first blush, the Australian labour market seems to be performing relatively well. Unemployment has consistently been around 4% for the last three years, the longest period it has been sustained at this level since the late 1960s. Under-employment is also low, while youth unemployment and female participation have improved markedly.
However, the performance of the labour market cannot be measured solely by the unemployment rate. If we look beyond the headline indicators, we can see that the labour market has recently failed to meet the needs of employers, employees and the economy as a whole.
Job creation has become unsustainably dependent upon government spending. Growing regulatory burden has raised the costs of private sector employment generation. Job mobility rates have rapidly declined, while excess vacancies and skills shortages have disrupted business operations and efficiency.
These labour market problems are a material drag on national productivity. They make employment creation more expensive and difficult, reduce the efficiency of job matching for employees and employers, while disrupting the productivity and curtailing the growth of businesses. Indeed, productivity outcomes since the pandemic are worse in those industries which suffer from labour market problems the most.
In this research note, we identify and examine six areas where the Australian labour market has become increasingly dysfunctional since the pandemic. Reforms to address these issues should be a top priority at the upcoming Reform Roundtable.
The most pertinent challenge facing the Australian labour market today is the extent to which its resilience has become dependent on government support.
To maintain steady unemployment and participation rates, the Australian economy needs to create approximately 400,000 new jobs every year. Since the pandemic this has been achieved, ensuring that unemployment has held at around 4.0%. However, the composition of job creation has changed dramatically.
Typically, the private market sector accounts for about two-thirds of job creation in Australia. However, as the economy has slowed since 2023, private sector job creation rates have collapsed. In 2024, the sector only added 53,000 new jobs – about a fifth of its normal level of job creation.
In its place, two government-supported sectors took up the slack. These are the public sector (where workers are directly employed by government), and the non-market sector (industries such as healthcare and education). Employment growth in these industries is primarily driven by government funding decisions rather than market conditions.
Employment in these government-supported sectors has boomed since the pandemic, adding an additional 670,000 jobs over the last two years. This is over five times higher than the normal growth rate, and ultimately accounted for 82% of all job creation in Australia. It was driven by significant uplift in public sector staffing levels, as well as the rapid expansion of the private sector (but government funded) care economy workforce.
This sudden boom in government-supported jobs offset the mounting weakness in the private sector. Had it not occurred, the very low rates of private sector job creation would have seen unemployment materially rise during 2024. Our recent labour market resilience has only been achieved through, and is wholly dependent on, increasing levels of government spending.
This trend of government-supported job creation is not ultimately sustainable. It places an ever-increasing pressure on state and federal budgets, whose current fiscal positions cannot maintain these record rates of job creation indefinitely. Cost blowouts in many areas of government service provision – including but not limited to the NDIS and public sector wage bills – are the corollary of this stimulus.
There is an urgent need for a transition in the labour market – where the private sector resumes its role as the primary engine of job creation as government-funded employment eventually normalises. If this isn’t smoothly achieved in 2025, our labour market resilience will soon be at risk.
While sluggish economic conditions have been the principal factor behind slowing private sector job creation, growing regulatory burdens have compounded the problem. Since the pandemic, employers have had to contend with surging employment related oncosts driven by regulatory and policy changes.
Wages paid to employees are only one part of the cost involved in employment. Three regulatory regimes – for superannuation, workers’ compensation and payroll tax – add to the total employment costs businesses face. For many years, the oncosts imposed by these regulatory regimes have been relatively stable in Australia, adding approximately 14% to wage costs. But since the pandemic, all three have increased simultaneously:
Together, these three increases have raised the regulatory oncosts of employment in Australia from around 14% to 15.6% in the last three years. This is a sudden and dramatic rise given these costs had been stable for many years. Expressed in dollar terms, these regulatory increases have added an additional $14.3 billion annually to the cost of employment in Australia, compared to if the burden had remained at its long-term rate of 14%.
The capacity of private sector businesses to pass these costs on depends on conditions in their particular market. For those that can, they become yet another contributor to Australia’s inflationary pressures. For those that cannot, the costs have to be borne on the balance sheet, limiting the financial resources available for investment and employment generation.
The boom in government-supported jobs since 2023 has suppressed unemployment, but at the cost of a rebalancing of the labour market. One consequence has been the perpetuation of excess job vacancies with deleterious consequences for productivity.
Due to frictions in job matching, there is a background level of vacant jobs in the labour market. Depending on the state of the economy, this is typically in the range of 1.1% to 1.7% of jobs being vacant at any given time. However, since the pandemic the economy has struggled with an overhang of vacancies well above normal levels.
The problem began in 2021, when a recovering economy ran up against workforce shortages resulting from Australia’s decision to close its borders to migration. Labour demand exceeded supply, and by the middle of 2022, the number of vacant jobs in Australia had more than doubled to 488,000. Given background rates, around 250,000 of these vacancies were ‘excess’ to those associated with the normal operation of the labour market.
As the disruptions of the pandemic worked through and the economy slowed, these excess vacancies should have been gradually cleared. However, they have proven stubbornly persistent. 330,000 jobs remain unfilled in early 2025, around 100,000 more than the midpoint of the normal range. The persistence of excess vacancies is the consequence of a labour market which, due to government stimulus, is still seeing labour demand greatly exceed its supply.
Excess job vacancies have a negative impact on both productivity and investment. Unfilled jobs disrupt normal shopfloor operations, and inhibit the optimal allocation of resources within a business. They also deter growth, as businesses that are unable to fill existing roles report being less likely to pursue new market opportunities until those roles are filled. Currently weak rates of productivity and growth in the private sector can be partially explained by the drag imposed by excess vacancies.
An often-overlooked dimension of productivity are rates of labour mobility – how frequently employees change jobs.
Research shows that labour mobility is an important contributor to productivity growth. When employees change jobs with the same employer (typically, via a promotion) it reflects higher labour quality and skills utilisation. When employees change jobs between different employers, it improves the efficiency of job matching and enables a reallocation of labour from lower- to higher-productivity firms.
It is therefore concerning that rates of job mobility in Australia have been steadily declining for over 50 years. In the 1970s, job mobility rates were around 16% annually, reflecting a high circulation of employees within the labour market. By the early 2000s the mobility rate had fallen to around 12%, and then to 8% just before the pandemic.
There was a slight jump in job mobility immediately following the pandemic – colloquially called “the Great Resignation” at the time. However this proved very short-lived, and mobility rates have since fallen back towards their long-term trend. Job mobility was 7.7% in 2025, the lowest rate on record outside of the lockdown-affected year of 2021.
Some of the decline in job mobility reflects demographics and the aging of the population. Mobility is consistently lower for older age cohorts: with rates of 5% for those over 45, compared to 10% for 25-44 year olds and 13% for 15-24 year olds. As Australia’s population ages, the overall rate of job mobility will naturally decrease in tandem.
However, not all of the decline in mobility is due to population aging. Even within the younger age cohorts, there has been a steady fall in rates. Since the mid-1990s, annual mobility rates have dropped by 10 percentage points for 15-24 year olds, and 3 percentage points for 25-44 year olds. Younger employees are changing jobs less frequently than their parents did at the same age – the opposite of the conventional wisdom that future generations will be a more mobile workforce.
Whether due to population aging or lower youth mobility, the declining rate of job mobility has clear impacts on productivity. Employees staying in the same job for longer miss opportunities for advancement in pay and/or skills; while the flow of labour from lower- to higher-productivity firms is slowed. Arresting the decline in youth mobility – and potentially raising the low mobility rates of older workers – would help improve the matching efficiency of the labour market and boost productivity outcomes.
The persistence of excess vacancies has exacerbated a further challenge for employers – shortages of skilled employees in particular occupational classes.
The best measure of skills shortages in Australia is provided by Jobs & Skills Australia’s Occupational Shortages List (OSL). This identifies the specific occupations where employers face considerable difficulties in securing staff, based on the fill rates for advertised vacancies.
In 2024, the OSL identified that 112 occupational categories in Australia were in national shortage. The affected occupations were extremely diverse, ranging from engineering, financial and medical professionals at the higher skill level, through to plant operators, construction workers and care workers in lower skilled occupations.
The impact of these skills shortages on Australian employers is significant. Across the economy, the 112 occupations facing shortages represent a third of the Australian workforce. However, the impacts are particularly felt amongst two clusters of industries:
The impact of skills shortages on industry mirror and magnify those of excess job vacancies. Businesses which rely on occupations in shortage will struggle to recruit and retain staff in critical roles, with impacts on operational continuity and efficiency. Business development and expansion will also be curtailed when there is low confidence that a sufficient workforce can be recruited.
These dysfunctions in the labour market are not simply academic problems. They are having a direct and negative impact on the productivity of the Australian economy. Indeed, there is a clear correlation between those industries most affected by labour market dysfunctions and those with lower productivity outcomes.
Australia’s productivity performance since the pandemic has been very poor. If we exclude the mining industry – where measured productivity is highly sensitive to global commodity prices – labour productivity in Australia has risen 3.0% since 2019. This implies an annual growth rate of 0.5%, less than half the 1.1% p.a. rate which Australia has averaged over the last three decades.
The pandemic marks a break in Australia’s productivity trajectory, with performance materially lower since it began. If we examine which industries are driving this post-pandemic slump, it is clear there are two clusters responsible for the change.
The first are industrial sectors, which sit at the bottom of the national productivity leaderboard. Utilities, manufacturing and construction have all seen labour productivity go backwards since 2019. Declining industrial labour productivity is especially problematic for delivering the energy transition, increasing home building rates, and developing advanced manufacturing capabilities.
The second cluster of low productivity is found in the care economy. Education has seen below-average growth over the last five years, while healthcare & social has delivered the worst result in Australia with labour productivity collapsing 9.6%. This is a major crisis for the sustainability of these critical public services, as it implies an increasing amount of labour – and subsequent cost to government budgets – just to deliver the same amount of service activity.
Importantly, this data also shows that Australia’s productivity problem is not universal across the economy. Several industries have turned in very strong improvements since the pandemic, with professional services lifting by 11.4%, accommodation & food by 14.6%, while information media & telecoms has risen by a solid 25.6%. However, the results from these high performers have been dragged down by weak outcomes in the industrial and care sectors, suppressing overall productivity growth.
This data points to a clear connection between Australia’s productivity problems and dysfunctions in the labour market. It is those parts of the economy which are suffering the most from workforce shortages – the industrial and care sectors – which are also delivering the worst labour productivity outcomes.
This finding should come as no surprise: an industry which is struggling to recruit and retain a sufficient workforce is also going to struggle to deploy that workforce in an efficient and productive manner. As implementing productivity improvements depends on higher skilled roles – such as senior technical and specialist staff – chronic shortages of these personnel also inhibit innovation in business process change.
However, it also points the way to an immediate solution for Australia’s productivity crisis – improving the poor functioning of Australia’s labour market. While the labour market is over-stimulated by government-spending, burdened by rising regulatory costs, facing declining job mobility, and struggling with excess vacancies and skills shortages, labour productivity will inevitably suffer.
Reforms to address these labour market dysfunctions are an important, if not essential, method to unlocking better productivity outcomes. It is critical that the forthcoming Economic Reform Roundtable makes labour market reform a central part of its productivity agenda.
Jeffrey Wilson is Head of Research and Economics at the Australian Industry Group.
He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
