Hysteresis in Australia’s Economy: 2026 Policy Impacts & Real-World Effects

In simple terms, hysteresis describes a situation where the effects of an economic shock linger long after the initial cause disappears. For instance, when unemployment spikes during a recession, it doesn’t always fall back to previous levels even after recovery begins. That ‘scarring’ effect — where short-term pain leads to long-term shifts — is classic hysteresis at work.

• Workers may lose skills or drop out of the labour force entirely.

• Businesses may delay investment or permanently downsize.

• Productivity can stagnate, keeping growth below potential.

For Australia, which enjoyed nearly three decades of uninterrupted growth before 2020, hysteresis is now a key economic concern. Recent policy debates focus on how to break this cycle and avoid a permanently smaller, less dynamic economy.

The COVID-19 pandemic and the inflationary shocks of 2022–2023 delivered a double blow to employment. By 2026, the national unemployment rate has improved to around 4.2%, but that headline figure masks persistent underemployment and workforce detachment in certain sectors.

Consider these current examples:

• Hospitality and Retail: Many workers who lost jobs in 2020–21 have not returned, instead retraining for other industries or leaving the workforce.

• Regional Australia: Towns hit by tourism downturns or industry closures are still struggling to recover, with youth unemployment above pre-pandemic levels.

• Older Workers: Australians over 55 who exited the job market during lockdowns are finding it harder to re-enter, facing both skill gaps and age discrimination.

The RBA’s 2026 reports highlight how these trends risk becoming entrenched, creating a smaller pool of available workers and limiting overall economic growth. The longer workers remain detached, the more difficult it becomes to reverse the damage — a classic hysteresis loop.

Recognising the risks, the Federal Government and RBA have made hysteresis a central focus in 2026 policy design. Here’s how they’re tackling it:

• Active Labour Market Programs: Expanded funding for reskilling and job matching, including digital skills bootcamps and targeted support for older workers.

• Investment Incentives: Temporary full expensing for business investment extended to June 2026, aimed at encouraging firms to modernise and expand headcount.

• Childcare Reforms: Increased subsidies to lift female workforce participation, addressing a key area of persistent labour market slack.

• Regional Support: Grants and infrastructure projects targeting towns with stubbornly high unemployment.

These measures are designed to prevent temporary shocks from leaving permanent scars, ensuring the economy’s ‘memory’ doesn’t trap Australia in a lower-growth, higher-unemployment equilibrium.

For investors, business owners, and families, understanding hysteresis is more than academic. It shapes everything from wage growth and job security to property prices and returns on investment. If hysteresis keeps growth sluggish, wage rises may stall and asset values could underperform expectations.

• Property Market: Regions with entrenched unemployment may see weaker housing demand and slower price growth.

• Share Market: Listed companies in sectors hit by long-term scarring (e.g., travel, hospitality) may take years to recover pre-pandemic earnings.

• Superannuation: Slower wage growth reduces contributions, impacting long-term retirement balances.

On the flip side, effective policies that break the hysteresis cycle can unlock new growth, create jobs, and support higher living standards for all Australians.