Australia's falling unemployment rate is painting a misleading picture of the jobs market's health, according to a report from JP Morgan.

The headline, seasonally adjusted unemployment rate has edged lower this year to 5.6 per cent, the lowest level in around three years.

However, this dip in unemployment has been accompanied by a continued rise in underemployment.

"While the unemployment rate has fallen four-tenths since the start of the year, the underemployment rate has edged up steadily and now tracks 8.7 per cent, an all-time high," observed JP Morgan economist Tom Kennedy.

"Although these rates have not moved in lock-step historically, discrepancies of this magnitude and duration are uncommon."

Unemployment has edged lower but underemployment has surged. ( Supplied: JP Morgan )

The discrepancy is of concern to economists because it means household income growth is not reflecting the low rate of unemployment, a key factor holding inflation at uncomfortably low levels.

Not only are household incomes suffering because a large proportion of people are not able to work as many hours as they would like, but also because this pool of people are keen to get more work and therefore potentially willing to accept lower wages.

This 'reserve army' of part-time workers who would like more hours has contributed to the lowest level of wage growth on records that go back to the late-1990s, at just 2.1 per cent.

Shift to part-time work driven by several factors

Mr Kennedy said the shift to part-time work appears to be driven by two major forces.

The first is that employers who need extra staff to meet increased demand are not confident in the durability of the recovery to take them on full-time, preferring part-time and/or casual.

The second is that many existing staff are having their hours cut, rather than being laid off altogether, in sectors that are still struggling.

This is because recent economic weakness has not been as severe as previous episodes, such as the early 1990s recession, and because industrial relations laws have made it much easier for employers to engage casuals and to change their staff's working conditions.

Part-time jobs growth has easily exceeded full-time employment creation. ( Supplied: JP Morgan )

Two other factors are exacerbating the trend towards part-time employment.

One is that former resources sector workers may be working more than one job in order to try and make up for the lower wages outside that sector.

The other is that some of the biggest areas of employment are in retail, accommodation and health - industries that all have a high proportion of part-time staff.

With these factors unlikely to change rapidly, and the economy unlikely to improve drastically, Mr Kennedy concluded that the Reserve Bank may have more work to do if it wants to boost inflation.

"Given our forecast for domestic demand growth to accelerate only gradually in coming years, we see no reason to expect a material change in firms' hiring behaviour, meaning elevated underemployment and benign wage growth may persist for some time yet," he noted.

"In terms of monetary policy, this analysis argues that the labour market alone is unlikely to generate the required upturn in inflation, and puts pressure on the RBA to move the cash rate lower."

JP Morgan expects two more interest rate cuts in the first half of next year, taking the cash rate down to 1 per cent.

The latest Bureau of Statistics employment figures for September will be released on Thursday morning.