Employment in Australia unexpectedly contracts, slack persists

Australia's jobless rate hit a three-year low in August, yet employment still dipped in the month and the swelling numbers looking to work longer hours pointed to plenty of spare capacity in the labour market.

Thursday's data from the Australian Bureau of Statistics showed 3,900 net new jobs were lost in August, a sharp contrast to forecasts of a 15,000 gain. Even so, the jobless rate fell to 5.6 per cent as fewer people looked for work.

While full-time positions rose 11,500 in August, that was not enough to make up for a plunge in July.

All of which could keep wage growth at record lows and feed through to muted demand and confidence, a worrying trend that might force the Reserve Bank of Australia's (RBA's) hand once again.

"You wouldn't expect on these numbers, wage growth pushing back up anytime soon," said Ben Jarman, Sydney-based economist at JP Morgan. "We still think there's enough spare capacity in the market to keep inflation low and put pressure on the RBA to lower rates over time," he added.

Currency investors reacted to the mixed report and pushed the Australian dollar about 20 ticks lower to $0.7450. Debt markets imply a 30 per cent chance of another cut in rates by Christmas.

The RBA lowered its cash rate a quarter point to an all-time low of 1.5 per cent in August, in part because spare capacity in the labour market was depressing wages and inflation.

"The drop in the jobless rate suggests there's enough activity in the economy to keep the labour market ticking over. On that alone, the RBA would not be cutting rates again," said Michael Blythe, chief economist at Commonwealth Bank.

"However, underemployment is still high and there's little sign the drop in unemployment is generating stronger wages growth and thus inflation," added Blythe.

While the unemployment rate in Australia has been nudging lower, the underemployment rate – people who want to work more – rose to a new all-time high of 8.7 per cent in August.

Combined, the measures give an underutilisation rate of 14.3 per cent, above the levels seen during the global financial crisis.

Such high spare capacity in the labour market limits the ability of workers to push for pay rises. Indeed, figures out last month showed wage growth stayed stuck at a record low of 2.1 per cent last quarter.