Private-sector job creation in sharp reversal

Private-sector job creation has collapsed as employment funded by federal and state governments soars to five times the normal rate, sparking warnings of unsustainable distortions in the labour market that are at the heart of the nation’s productivity slump.

Analysis of labour-market data shows that 82 per cent of all jobs created over the past two years were government-funded positions, with the private sector adding only 53,000 jobs in 2024.

This marks a dramatic reversal of normal labour market trends, in which the private sector typically contributes about two-thirds of total job creation.

While Jim Chalmers has ruled out discussion of industrial relations at this month’s economic and productivity summit, employer groups are demanding that dysfunction in the labour market needs urgent attention.

Australian Industry Group analysis shows that the historically low unemployment rates maintained since the pandemic are masking a fundamental shift in the composition of job creation, which lies at the heart of the nation’s productivity slump.

It warns that labour-market resilience, as shown in official unemployment data, was being supported almost entirely through government spending, leading to an excess of job vacancies in the private sector.

This was unsustainable, according to the Ai Group, which also pointed to a dramatic fall in mobility rates – the frequency of workers changing jobs or roles – to a record low in 2025 that was directly linked to productivity.

The analysis showed that the number of new jobs needed for the economy to maintain an unemployment rate of about 4 per cent was approximately 400,000 a year.

“Since the pandemic, this has been achieved, however, the composition of job creation has changed dramatically,” the Ai Group analysis said.

“Typically, the private market sector accounts for about twothirds 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.

“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 per cent 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.

One of the Albanese government’s key election boasts was its maintenance of low unemployment and job creation.

But the bulk of those jobs have been in the public sector (where workers are directly employed by government), and the non-market sector (industries such as healthcare and education) which are driven by government funding decisions.

“Job creation has become unsustainably dependent upon government spending,” the Ai Group research said.

“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.”

The public sector was the least productive part of the economy and, with public spending showing signs of easing, unemployment rates have begun to rise.

Last month, the jobless rate surprised experts by jumping from 4.1 to 4.3 per cent. This prompted economists to call for the central bank to lean in further on interest-rate cuts, following its surprise decision last month to keep them on hold, to protect the economy.

Ai Group chief executive Innes Willox said the historically low headline unemployment rate had created a “blind spot to labourmarket trends that are decreasing our productivity, our wellspring to national wealth”.

“While the labour market has remained resilient, with the jobless rate around 4 per cent for the past three years, in many other respects it is failing to meet the broader needs of our economy or productivity,” Mr Willox said.

“There are four key areas that are a material drag on productivity: job creation has become almost entirely dependent on government spending; a growing regulatory burden has increased private sector costs; there is a persistent overhang of excess job vacancies; and mobility is declining.

“These all make job creation more expensive and difficult, reduce the efficiency of matching jobs to employers, while disrupting productivity and sapping business growth.

He said there was an urgent need for the private sector to resume its role as the primary job creator “or our labour market resilience will be at risk”.

“Regulation has pushed up employment costs since the pandemic, with growth in superannuation, workers compensation and payroll tax adding $14bn to the annual wage costs,” Mr Willox said.

“The regulatory costs for employment, on top of wages, have grown to 15.6 per cent from 14 per cent in the past three years.

“We have a plague of excess job vacancies, which disrupts business operations, make it harder to allocate resources properly and less likely to pursue new opportunities for growth.”

Mr Willox said the intervention by governments to prop up job creation through their budgets had starved the private sector with about 330,000 jobs remaining unfilled at the beginning of 2025. This was 100,000 more than the historical average.

“This persistence of excess vacancies has exacerbated a further challenge for employers: a crippling skills shortage,” Mr Willox said. “The sectors with the most chronic shortages – healthcare and social – also delivered the worst productivity outcomes, so there is a clear link between the two.”

Mr Willox said the issue needed to be a central piece of the productivity debate at the Treasurer’s roundtable this month.