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Australia's headline unemployment rate was 4 per cent in May, down 0.1 percentage points from April.
The unemployment rate declined slightly because employment rose by 40,000 people in May, and the number of officially unemployed people fell by 9,000.
The Bureau of Statistics says in April there had been more unemployed people than usual who were waiting to start work, so some of the fall in unemployment in May, and some of the rise in employment, reflected those people finally starting work.
However, ABS data show the "trend" unemployment rate — which looks through the more volatile seasonally adjusted monthly figure — picked up slightly in May, from 3.9 per cent to 4 per cent.
It is the highest the trend unemployment rate has been since the ABS re-introduced the trend series data in April 2022, once the tumultuous lockdown period had ended.
Analysts say the unemployment rate will likely keep rising in the months ahead, and the Reserve Bank will probably stay in its wait-and-see mode.
"At 4 per cent, the unemployment rate is spot on the RBA's forecast for the second quarter," Tony Sycamore from IG said.
"Spare capacity is gradually increasing, reflected by softening in the forward indicators and the trend higher in the unemployment rate.
"Today's numbers will not impact the outcome of next week's RBA meeting, where rates will likely be kept on hold at 4.35 per cent for a fifth straight meeting," he said.
In May, employment growth was driven by full-time employment.
Full-time employment increased by 41,700 and part-time employment declined by 2,100, which hasn't been the trend over the last year.
Over the last 12 months, almost three-quarters of new jobs in the economy have been part-time positions.
But economists say these numbers appear consistent with the RBA’s expectations regarding labour market conditions.
"Overall, monetary policy appears to be working and there is clear evidence that monetary policy is having the intended impact on the Australian economy, even if that's been slower than the RBA might prefer," Callam Pickering, Asia Pacific economist at global job site Indeed, said.
"We view monetary policy as being tentatively poised. Another unwelcome surprise on the inflation front could certainly force the RBA to take action.
"Nevertheless, we believe that the economy will be sufficiently weak this year to drag down service sector inflation, with the recent inflation figures being more an aberration than a change in trend," he said.
The 'goldilocks' scenario for markets?
The graphs below show the gradual return of "space capacity" to the labour market over the last 18 months.
The headline unemployment rate is currently 4 per cent (up from its low of 3.5 per cent), the underemployment rate is 6.7 per cent (up from 5.9 per cent), and the under-utilisation rate is 10.7 per cent (up from 9.4 per cent).
The number of long-term unemployed people has increased from 90,800 to 125,500 since April last year.
But that gradual increase in under-utilisation has occurred within a context of historically-high rates of labour market participation.
As the graphs below show, the participation rate and the employment-to-population ratio are still sitting well-above their pre-pandemic levels.
David Bassanese, chief economist of BetaShares, says that will be welcome news for investors and the RBA.
"As in the United States, the slow gradual rise in the unemployment rate is consistent with the 'goldilocks' or 'soft landing' scenario markets have long been hoping for," he wrote in a note.
"It's almost too good to be true.
"Consistent with such glacial labour market slowing, wage growth is also slowing in both economies, which strongly suggests service inflation will also ease further and the next move in the US and Australian official rates will be down."
Youth disproportionately impacted
However, the softening in labour market conditions has been hitting some groups more than others.
"Rather than an uptick of lay-offs or redundancies, employers are instead tempering their hiring plans and shaving off the hours they offer to their employees," Harry Murphy Cruise from Moody's Analytics said.
"For the latter, that's seen monthly hours worked fall over the last few months.
"For the former, it's seen the newest entrants to the labour market — predominantly young Aussies and new migrants — face a much tougher go at getting their foot in the door.
"Unemployment for both of these groups has jumped more than the national average," he said.
Westpac economists Ryan Wells and Pat Bustamante said similar things.
"Underlying this result is a disproportionate softening in conditions faced by those aged between 15 and 24, who have experienced an almost 1 percentage point increase in their underemployment rate over the past two months," they said.
"More disconcerting developments around youth labour market conditions bear close monitoring, as this may provide an early signal of further easing in broader labour market conditions ahead."
And more unemployment to come
The Reserve Bank's most recent forecast has the unemployment rate sitting at 4 per cent by the end of June, and 4.3 per cent by June next year.
Its forecasts are in the table below.
Stephen Smith, principal partner of Deloitte Access Economics, says the labour market has proved "a bit more resilient" than expected, given the sharp rise in interest rates since May 2022.
But he still thinks the unemployment rate will hit 4.5 per cent by June next year.
"We do think, unfortunately, that there will be something in the order of another 100,000 people added to the ranks of the unemployed between now and the end of this calendar year," Mr Smith told the ABC.
"We're starting to see a number of larger businesses make redundancies. We're also seeing a lot of that happening to smaller businesses as well.
"Generally, less household spending means less income for businesses, but it's also not so much wages, but other input costs that businesses are having to wear that's also hitting their bottom line.
"We're also starting to hear some noise out of the university sector as well," he said.
However, Mr Smith said households would see some cost-of-living relief in coming months, when tax cuts and other government subsidies start flowing through the system.
He said that will lift some pressure from households and businesses, but it won't be enough to prevent more job losses between now and the end of the year.
"It may actually be quite good timing that the drop-off in migration is coming just as the labour market starts to soften," he said.
He said he was still expecting the Reserve Bank to cut interest rates in November, on the basis of a weakening labour market.
"The RBA is watching pretty closely that balance between the unemployment rate and the pace of employment growth, along with inflation continuing to retreat back towards the target of 2–3 per cent," he said.
On Tuesday this week, ANZ's economics team officially changed their interest rate forecast.
They had been forecasting the RBA's first rate cut to occur in November, but now they think it will not occur until February next year.