Unemployment and underemployment are key economic factors that impact small businesses from consumer spending to hiring challenges. Understanding these concepts can help business owners make informed decisions in an uncertain economy.
Currently, Australia’s unemployment rate is 4.2%. High unemployment reduces disposable income, leading to lower sales and revenue for small businesses. Conversely, when more people are employed, disposable income rises, driving demand for products and services and boosting sales.
At the same time, underemployment can lead to a less satisfied workforce, but small businesses might benefit from identifying underemployed workers who are eager for better opportunities.
Business confidence and economic growth
Unemployment trends are closely linked to business confidence. When the unemployment rate rises, it becomes easier for companies to recruit and retain staff; when the unemployment rate falls, it becomes harder.
When the economy shows signs of slowing, as has happened throughout 2024, businesses often hesitate to expand or hire. This affects the wider economy, where reduced business activity leads to fewer job opportunities, which in turn suppresses consumer spending.
This is concerning for small businesses, which are vulnerable to fluctuations in consumer demand. As businesses cut costs to weather economic uncertainty, they may reduce staff or offer fewer hours to existing employees. This cautious approach to hiring leaves many workers in temporary or contract roles instead of permanent positions, further contributing to underemployment.
The unemployment rate as an economic indicator
The unemployment rate is not just a labour statistic; it’s a key economic measure by the Reserve Bank of Australia (RBA).
A rising unemployment rate could prompt the RBA to lower interest rates, encouraging businesses to invest and hire more workers. Conversely, if unemployment falls, the RBA may raise interest rates to control inflation. For small businesses, higher interest rates can make borrowing more expensive and limit growth opportunities.
Opportunities for small businesses
Despite the challenges, a 4.2% unemployment rate presents opportunities:
- Innovative staffing solutions: If hiring is challenging, consider innovative solutions such as part-time employees, contractors or remote workers. These flexible staffing models can help fill gaps without overwhelming your budget.
- Employee retention strategies: Retaining employees during tight labour markets can give your business a competitive edge. Consider offering training opportunities, non-monetary perks and creating a positive workplace culture to keep your team loyal.
Small businesses that adapt to changes in the labour market, whether through strategic hiring or improving internal processes, are better positioned to succeed in a fluctuating economy.