The unemployment rate fell to just 4.2 per cent last month before the omicron virus wave disrupted the economy, the lowest jobless rate since the mining boom in 2008.
The hiring spree since the end of the delta lockdowns in NSW and Victoria last year will pressure the Reserve Bank of Australia to consider increasing interest rates sooner than anticipated, possibly this year.
The RBA has previously said the unemployment rate needs to fall to the high 3s or low 4s to hit full employment and generate stronger wages growth, which would help lift inflation and enable the central bank to increase borrowing costs.
The addition of 64,800 jobs in December reported on Thursday by the Australian Bureau of Statistics caused the national unemployment rate to fall from 4.6 per cent in November.
Unemployment was 4 per cent or less in four of the eight states and territories.
Positively, hours worked rose and underemployment – employed workers who want more hours – fell.
A record 13.2 million Australians were employed in the busy pre-Christmas shopping period, when the labour force survey was conducted during early December.
Job gains were strongest in NSW and Victoria, which added 57,000 jobs combined, after they roared back to activity following the end of the delta lockdowns.
However, the labour market has since been hit by disruptions from the omicron virus wave and a lack of rapid tests, forcing thousands of workers to isolate and businesses to operate below capacity.
BIS Oxford Economics chief Australia economist Sarah Hunter said hours worked would fall in January, with experience from overseas suggesting that the impact of omicron would be “significant but short-lived”.
“Overall, the unemployment rate is set to remain below 4.5 per cent this year, and with businesses still looking to add staff this will create further upward pressure on wages, particularly in the private sector, and domestic inflationary pressure,” Dr Hunter said.
“Today’s data reinforces our view that the RBA will tighten the cash rate much earlier than they are currently signalling.”
RBA governor Philip Lowe said in November that interest rate rises in 2022 are “extremely unlikely”, but more market economists are casting doubt on that assertion.
Since then, the labour market has tightened and job vacancies have hit a record of almost 400,000 positions, as business complains about chronic labour shortages.
Shortly before the bullish jobs data was published, Westpac chief economist Bill Evans earlier on Thursday forecast the RBA to increase the cash rate by 0.15 of a percentage point in August, followed by a further jump of 0.25 of a percentage point in October.
“Omicron is forecast to have its major impact on the economy in January through a contraction in consumer spending,” Mr Evans said.
“Thereafter we expect a solid bounce back in the later stages of the March quarter and in the June and September quarters.”
Inflation data for the December quarter due next Tuesday will be an important piece of information for the RBA, before it holds its first board meeting of the year on February 1 and publishes updated economic forecasts that week.
The RBA is expected to announce that its $350 billion government bond buying program will end in February.
Dr Lowe has said he wants to see wage growth above 3 per cent – from a subdued 2.2 per cent– to be confident that inflation will be sustained in the bank’s 2 per cent to 3 per cent target band.
HSBC chief economist Paul Bloxham said the labour market had tightened again, but the international border was now re-opened to international students and skilled migrants.
“In short, the effect of a closed border in tightening the labour market, driving skills shortages and lifting wages growth is likely to be near its peak,” Mr Bloxham said.
“The good news for the RBA is that, at their current levels, the unemployment and underemployment rates might start to put some upward pressure on wages growth.”
“We see cash rate hikes as likely in 2023 rather than in 2022.”
Global inflation pressures are building due to supply chain disruptions, labour shortages and stimulus-fuelled consumer demand.
US inflation has surged to a 40-year high and UK inflation has hit a 30-year high.
The RBA’s preferred measure of underlying inflation, which strips out volatile fuel and food prices, was a more modest 2.1 per cent over the year to September 30.
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