The RBA's post-COVID rate hikes caused Australians to work more

Tighter monetary policy is supposed to dampen aggregate demand and discourage employers from hiring workers. (Reuters: Jason Reed) Link copiedShareShare articleNow that the Reserve Bank has lifted interest rates for the third time this year, how will you respond? Are you thinking about getting a second or third job, or entering the workforce, to pay for your household's rising interest payments? Because a recent working paper published by the International Monetary Fund (IMF) found that this is exactly what thousands of Australians did when the RBA hiked rates rapidly in 2022 and 2023. The RBA has lifted rates by 0.25 basis points to 4.35 per cent, which fully unwind last year's rate cuts. It found that it led to an increase in the supply of labour in Australia that was so significant that it challenged a long-held central bank idea. As the paper explained, a common working assumption for central banks is that labour supply is not significantly affected by monetary policy. As the thinking goes, when central banks lift interest rates, the higher rates increase firms' borrowing costs, which, in turn, reduces investment, output, and employment. So, tighter monetary policy impacts labour markets indirectly through firms' demand for labour. But the paper found that this is not what happened in Australia in 2022-23. It said that when the RBA lifted rates rapidly, many Australians in highly indebted households entered the workforce (if they were not already working), or took on second or third jobs, or increased their hours, in a pronounced way. "We have tested and rejected the hypothesis that labour supply is unresponsive to monetary policy settings," the paper said. The paper's authors are Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig, and John Spray. Jonathan Hambur is an RBA economist, but the paper represents his personal views, not those of the bank. They studied the period of monetary policy tightening that began in Australia in May 2022 and ran their analysis through to June 2025 (the RBA started cutting rates again in February 2025). During that time, the RBA increased the cash rate target by a cumulative 4.25 percentage points over 13 consecutive rate hikes. "The scale and speed of this episode provide an unusually sharp and well-defined shift in monetary conditions, creating an ideal quasi-experiment to assess the effects of monetary policy tightening on household behaviour," their paper says. In the graph below, the black line shows the RBA's rapid rate hikes from mid-2022, compared to other RBA rate-hiking cycles. (IMF Working Paper, "Labor Supply Effects of Monetary Policy: Evidence from Australian Mortgage Holders," prepared by Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig & John Spray, April 2026.) The paper says the transmission from monetary policy to mortgage holders happens very quickly in Australia. That is because the share of households with variable-rate mortgages (typically indexed to the RBA's policy cash rate) is substantially higher than in other advanced economies, accounting for around 70 per cent of outstanding mortgages in 2022, compared with less than 20 per cent in the United Kingdom and under 5 per cent in the United States. More people than ever before are picking up multiple jobs as the high cost of living pushes Australians to take on extra work, but the tax office warns people not to get caught out and know their obligations. That combination of a high prevalence of variable-rate borrowing and elevated household debt levels in Australia implies that interest rate changes can generate large and immediate effects on household cash flows in Australia. The paper also notes that the RBA's rapid rate hikes occurred against a backdrop of an unusually strong labour market when unemployment was near multi-decade lows, and labour demand (from businesses) was elevated relative to historical tightening cycles. That suggests that the ability for Australians to increase their supply of labour partly reflected strong underlying labour demand. Overall, the paper shows that the labour supply response to higher interest rates was significant in Australia. "The share of individuals working more than one job in Australia increased by 0.4 percentage points since the beginning of the rate-hiking cycle, which was equivalent to more than 100,000 additional workers," it found. The graph below shows when the multiple job-holding rate jumped well above its long-term trend. (IMF Working Paper, "Labor Supply Effects of Monetary Policy: Evidence from Australian Mortgage Holders," prepared by Mitali Das, Jonathan Hambur, Klaus-Peter Hellwig & John Spray, April 2026.) "Meanwhile, the participation rate has reached an historic high of 67 per cent, up from its pre-COVID level of roughly 66 per cent," the paper says. The paper found that the increase in interest rates in Australia induced a labour supply response among households most exposed to rising debt servicing costs. I

The RBA's post-COVID rate hikes caused Australians to work more

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