A STRONG labour market is increasing the risk of an interest rate hike by the end of the year, economists say.
The latest figures show that Australia's unemployment rate fell to 5.1 per cent last month after adjusting for seasonal factors, thanks to a surge of 53,100 in full-time emplyment levels.
A fall in part-time emplyment tempered the surge, but overall job levels stilll rose by 30.900 last month, according to the Australian Bureau of Statistics.
The fall in the jobless rate, down from 5.3 per cent in July, brings it back to levels reached in June last year.
RBC Capital Markets fixed interest strategist Su-Lin Ong said the data was "very strong across the board''.
"It's very strong overall and it's consistent with what's been an upside surprise in the growth numbers of late and I think at the end of the day the labour market is a pretty true reflection of the state of the economy,'' Ms Ong said.
"Growth is clearly at a trend pace and it's being supported by this big terms of trade shock and the income boost that's occurring at the moment.''
The participation rate last month was 65.4 per cent, down from an unrevised 65.5 per cent in July, the ABS said.
The forecast was for total employment to have risen by 30,000 in August, an unemployment rate of 5.2 per cent and a participation rate of 65.6 per cent, the median of 11 economists surveyed by AAP showed.
Ms Ong said the numbers "clearly confirmed the Reserve Bank of Australia's tightening bias, after the bank left the cash rate on hold at 4.5 per cent on Tuesday this week.
"The market, we think has been pretty complacent here in terms of pricing ina generally flat cash rate over the next 12 months,'' she said.
"This provides a bit of a wake up call markets.''
If it wasn't for the global uncertainty, data such as this would steer the central bank towards an interest rate hike sooner rather than later, she said.
"Given the global uncertainty, we think they'll probably sit on the sidelines for the next few months.
"If you get further tightening up of the labour market from here, then you'd have to say there is a real risk that the RBA moves before year end."
The Australian dollar rose almost half a US cent to reach US92.29 at 11.35am AEST, immediately after the ABS figures were released.
In the lead up to the jobless figures, many economists factored 60,000 to 70,000 temporarily-employed election workers into their initial forecasts.
However, the ABS survey was taken in the weeks before the election, while the vast majority of the temporary poll workers were employed for just the August 21 election, the Australian Electoral Commission told AAP.
"It's a cracker result,'' ICAP economist Adam Carr said.
"It's a good sign ... that's growth we saw in August and it had to with factors other than the election.''
"We know quarter two was phenomenal and the quarter three numbers are good as well.''
Mr Carr said he did not expect the data to put upward pressure on the RBA's interest rate decisions next month.
However, he expects the RBA to lift the cash rate from its current 4.5 per cent to 4.75 per cent or five per cent in November or December.
"The only question is timing,'' Mr Carr said.
"Will they do one or two? Will they wait for (inflation data)?
"For my money, I think they will wait for November. They're not in any rush.''
Nomura Australia chief economist Stephen Roberts said the employment data was "highly likely'' to prompt the RBA to increase interest rates in November.
"The unemployment rate, down at 5.1 per cent, is getting mighty close to that level where the Reserve Bank is going to get much, much more worried about capacity constraints going forward,'' he said.
"So I think this tends to firm up a lot expectations that the Reserve Bank will be back to raising rates, probably in November.''
The strong employment figures were consistent with other economic data released in the past few weeks, Mr Roberts said.
"This suggests there's a lot of income generation running through this economy, which will help to keep spending going in a very, very rapid pace over the course of the coming months.''
