Australian small and medium-sized businesses increased their workforce by 5.5% and raised wages above inflation, but hours worked fell. Ben Thompson explains the paradox that is reshaping the labor market.
What happens: Australian SMEs are adding staff at the fastest pace in months and lifting wages above inflation, but hours worked continue to fall. Employment Hero’s employment report shows that employment increased by 5.5% year-on-year, while hours worked fell by 0.2%. This creates a labor market paradox as unemployment reaches its highest level since November 2021.
Why this is important: The difference between rising workforces and falling hours suggests Australian businesses are fundamentally reshaping the way they deploy labor during economic uncertainty. With inflation at 3% and interest rates on pause, this shift could signal a decline in productivity or early evidence that automation is enabling the same production in fewer hours.
Australian SMEs are navigating a labor market contradiction, simultaneously adding workers and increasing wages while reducing the number of hours their employees actually work.
Employment Hero’s latest Jobs Report shows that employment increased by 5.5% year-on-year, 1.9% quarter-on-quarter and 0.8% month-on-month across the SME client platform. The average hourly wage increased to $45.20, which represents an annual increase of 5.0% that exceeds the current inflation rate of 3%.
Yet hours worked tell a very different story: they are down 0.2% year-on-year and 0.6% month-on-month, continuing what Employment Hero describes as an abysmal move into 2025.
Despite the uncertainty, hiring is increasing
Ben Thompson, co-founder and CEO of Employment Hero, said the gap between key unemployment figures and SME behavior makes this moment particularly important to watch.
“Recent headlines would make any Australian uneasy about the state of the labor market and that is reflected in behavior. But our data shows it’s not all doom and gloom. Employers are increasing workforces at a faster pace and offering higher hourly wages to secure capacity,” Thompson said.
The report shows that casual employment grew by 8.8% year-on-year, although informal working hours fell by 2.0% over the same period. Construction and trade generated employment growth of 7.6% year-on-year, while employment among teenagers increased by 23.9% annually and employment for 18-24 year olds increased by 7.0%.
This shift is unfolding as unemployment has risen to its highest level since November 2021, inflation is at the top of the RBA’s target range and interest rates remain on pause for a second month. Business confidence remains fragile and households report increasing financial pressure. Yet employers appear to be selectively hiring and increasing hourly rates to secure the required capacity.
Wage inflation is putting pressure on SMEs
Thompson highlighted what Employment Hero calls ‘wage inflation’, where wages are growing faster than inflation, despite increases in the consumer price index of up to 3%.
“In fact, wages are growing faster than inflation, despite the CPI rising to 3%. We call this ‘wage inflation’; it’s good for workers struggling with high costs, but it puts extra pressure on small businesses,” he said.
Wages rose fastest in construction and trade, with an annual increase of 6.2%, followed by science and technology with an annual increase of 5.5%. The average hourly wage increased by 2.6% on a quarterly basis and by 0.5% on a monthly basis.
The hours worked mysteriously
The continued decline in hours worked presents what Thompson describes as the most puzzling element of today’s labor market. While total hours fell by 0.2% year-on-year and 0.6% month-on-month, 18-24 year olds bucked the trend, increasing hours by 4.4% annually.
“What’s even more puzzling is that we haven’t seen any meaningful improvement in hours worked in months. It could be a sign of the productivity decline that has been building across the economy, or it could be the first sign that AI and automation are enabling the same output in fewer hours. The shape of work is changing, even as the macro picture still looks fragile,” Thompson said.
Job-hugging replaces ambition
Thompson said the data points to a fundamental shift in employer strategy from volume-based hiring to capability- and retention-focused hiring.
“We are in a risk-averse, sideways economy. Many workers are ‘cuddled’ by their jobs, or choosing security over ambition because of the state of the market. The employers who will benefit from this will be those who can provide stability, internal mobility and real productivity gains, not just workforce growth,” he said.
The findings come as the RBA maintains cash rates after earlier cuts in 2025, with the central bank expressing caution over the persistence of inflation in some areas. The unexpected rise in unemployment has prompted some economists to suggest the RBA may need to reconsider its timeline for further interest rate adjustments.
For more information about the jobs report, visit https://employmenthero.com/insights/jobs-report/.
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