Australia's unemployment rate has dropped to 5 per cent, the lowest level recorded since April 2012.

While the number of new jobs created in September, in seasonally adjusted terms, was weaker than expected, a drop in the number of people searching for work helped push unemployment down.

It is the lowest seasonally adjusted outcome since the 5 per cent the Australian Bureau of Statistics recorded in April 2012.

The number of jobs created rose by 5,600 over the month, with growth in full-time employment (20,300) outweighing a decline in part-time work (-14,700).

Importantly for the prospects of wage growth, the long-running slackness in the labour market appears to be tightening.

The underemployment rate — the measure of people in work, but looking for more hours — fell to 8.3 per cent.

The underutilisation rate — unemployment and underemployment combined, and a key forward indicator of wages pressure — decreased to 13.5 per cent.

Participation rate drop drives unemployment fall

Federal Treasurer Josh Frydenberg said the fall in the unemployment rate down to 5 per cent was "something to celebrate."

"Full-time employment up by 20,000, these numbers are consistent with the momentum we see in the economy," Mr Frydenberg said.

While the participation rate — a measure of people looking for work — fell, Mr Frydenberg said it remained near record highs.

"In terms of of the participation rate, more women and more seniors are in the workforce and over the year we have seen another 100,000 jobs created for young people."

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Economist from global jobs site Indeed, Callam Pickering, said 5 per cent may be as good as it gets, as the result was largely driven by a large fall in the participation rate.

"It would be surprising if the unemployment rate didn't bounce higher over the remainder of the year," Mr Pickering said.

"The monthly figures can be highly volatile and we shouldn't overreact to such a strong unemployment figure.

"The labour market has performed well recently, reducing labour market slack, but a 5 per cent unemployment rate is still a little too good to be true."

Mr Pickering said the highlight was continuing strength in full-time jobs, which have accounted for over 70 per cent of employment growth during 2018.

AMP Capital's Shane Oliver described September's data as confusing, with falls in the participation and unemployment rates likely to be sustained in the short-term.

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"As a result, the amount of slack in the Australian labour market is likely to remain in stark contrast to the US, where the underutilisation rate is approaching multi-decade lows, suggesting a significant acceleration in wage increases. In Australia this is still a fair way off," Dr Oliver said.

"Continued growth in total hours worked and the fall in the unemployment rate will benefit consumers through higher aggregate household income, as well as boosting consumer sentiment.

"Whilst we expect wage pressures to pick up gradually, the Australian consumer continues to face considerable headwinds due to the ongoing housing market correction and a savings rate that is already extremely low."

Dr Oliver said it all adds up to the Reserve Bank leaving interest rates on hold till at least 2020.