Statement on Monetary Policy – February 2026Box A: Update on the RBA’s Approach to Assessing Full Employment

Full employment is a longstanding objective of the RBA. The Monetary Policy Board aims to achieve ‘sustained full employment’, which is the maximum level of employment in the economy that is consistent with low and stable inflation.¹

Full employment cannot be observed directly or summarised by a single statistic, and it changes over time as the structure of the economy evolves. Accordingly, the RBA uses a broad set of information to assess how close the labour market is to full employment. This set includes wage and price indicators, model-based estimates and a range of labour market indicators.²

We recently reviewed how we incorporate information from our suite of labour market indicators, to make our approach to assessing labour market conditions more systematic, comprehensive and transparent. This review led to three key refinements:

1. Choice of labour market indicators. We reviewed our labour market indicators to verify which indicators provide information about future inflation and wages growth. Indicators that meet this test can help guide an assessment as to whether labour market conditions are tight relative to full employment (i.e. likely to place upward pressure on inflation) or loose relative to full employment (i.e. likely to place downwards pressure on inflation). As a result of this review, we have added some new labour market indicators and removed one of the existing indicators. The new indicators are: the vacancies-to-searchers ratio; hours worked per capita; the job-finding rate of the unemployed; and non-mining capacity utilisation. The indicator we removed is firms’ reported employment intentions, though we still watch this indicator closely in forecasting near-term employment growth.³
2. How we interpret each indicator. We have implemented a more systematic approach to identifying what each indicator tells us about how tight or loose the labour market is relative to full employment. Our previous presentation of the suite of labour market indicators compared each indicator to its historical average. In practice this approach has the limitation that, when an indicator is trending – for example, due to structural change in the economy – a historical average will include observations from a time when the series was structurally much higher or lower than the present day and therefore may not be the best benchmark for current full employment. This limitation was noted when it was introduced, and our overall view of labour market conditions has taken account of trends where necessary. However, we have now adopted a consistent and systematic approach to removing trends from each indicator, so that it is clearer how the suite of indicators maps to our view of labour market conditions. Because identifying underlying trends can be difficult, for each indicator we use a range of different methods to calculate the trend and then calculate the average deviation from trend across the different trend measures to add further rigour to our assessment.
3. How we summarise the individual indicators. We have generated a new summary measure that helps us to assess what the suite of indicators is telling us about labour market conditions relative to full employment. For each labour market indicator, we first calculate the average deviation from the various measures of trend discussed above (see Graph 2.20 in Chapter 2: Economic Conditions). We then construct a new summary measure that presents the full range of average deviations across the various indicators, as well as the middle 50 per cent of these deviations (see Graph 2.22 in Chapter 2: Economic Conditions). This new labour market indicator summary measure tends to follow the model-based estimates of the unemployment gap quite closely much of the time. However, there are periods in which individual labour market indicators can diverge, highlighting that the labour market can sometimes adjust in ways that are not fully captured by the unemployment rate. The labour market indicator summary measure, along with wage and price indicators and model-based estimates, informs our judgement-based assessment of labour market conditions relative to full employment.

Overall, the revised approach provides additional support for our assessment that there remains some tightness in labour market conditions (see section 2.4 Assessment of spare capacity in Chapter 2: Economic Conditions).

For more detail, see RBA (2026), ‘Update on the RBA’s Approach to Assessing Full Employment’, Technical Note, February.

Endnotes

1 See Treasurer and Monetary Policy Board (2025), Statement on the Conduct of Monetary Policy, July.

2 The RBA’s approach to assessing labour market conditions relative to full employment was set out in RBA (2024), ‘Chapter 4: In Depth – Full Employment’, Statement on Monetary Policy, February; Ballantyne A, A Sharma and T Taylor (2024), ‘Assessing Full Employment in Australia’, RBA Bulletin, April.

3 Employment growth is more closely related to the change in labour market conditions than the level of tightness of the labour market. For example, strong employment growth could be associated with a high and declining unemployment rate, or a low and declining unemployment rate.