The number of people employed in Australia slumped by 146,000 in August as a result of a number of coronavirus lockdowns across the country, wiping out the jobs gains seen since April.
However, the Australian Bureau of Statistics said the unemployment rate eased to 4.5 per cent from 4.6 per cent, when economists had expected it to rise to five per cent.
"The fall in the unemployment rate reflects a large fall in participation during the recent lockdowns, rather than a strengthening in labour market conditions," ABS head of labour statistics Bjorn Jarvis said.
He said the latest data covered the first two weeks of August, which included the continued lockdown in NSW, new lockdowns in Victoria, Queensland and the ACT, and a series of changes in restrictions in other parts of the country.
The participation rate of those in work or seeking employment fell from 66 per cent to 65.2 per cent, while hours worked in all jobs in the month fell by 3.7 per cent, or 66 million hours.
BIS Oxford Economics chief economist Sarah Hunter said the fallout from the NSW lockdown and the structure of the COVID-19 disaster payments has significantly distorted the labour market data.
She said the unemployment fall is not an accurate reflection of the health of the economy.
"With the economy in lockdown, those workers who are currently unable to work and not actively seeking a job are classified as not being in the labour force," Dr Hunter said.
Also those receiving support payments in NSW, Victoria and the ACT are currently not required to look for a job, which has led to a further decline in the unemployment count.
She expects the September figures will see a further step down in employment as it will include the full impact of the Victoria lockdown.
Thursday's data was surveyed between August 1 and 14.
Reserve Bank governor Philip Lowe warned this week that the unemployment rate could hit the "high fives" for a short period of time.
He also expects the economy will contract by at least two per cent in the September quarter, while financial market economists believe it could be as much as four per cent.
Shadow treasurer Jim Chalmers believes much of this economic damage could have been avoided.
He will tell the Business Council of Australia in a speech on Thursday it is not about being "heroes of hindsight" - as Prime Minister Scott Morrison has described it - but about "failures of foresight".
"An inability to anticipate the obvious," Dr Chalmers will say.
"Because amidst all these ups and downs of the last two years one thing has been certain - the recovery has always been hostage to federal government responsibilities like vaccinations and quarantine."
Australian Associated Press