The unemployment rate has dropped to 3.4 per cent, its lowest rate in 48 years.
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Figures released by the Australian Bureau of Statistics on Thursday show Australia had more positions open than job seekers to fill them last month.
"The fall in unemployment in July reflects an increasingly tight labour market, including high job vacancies and ongoing labour shortages, resulting in the lowest unemployment rate since August 1974," the bureau's head of labour statistics Bjorn Jarvis said.
The July figures follow a sharper than expected drop in the jobless rate in June.
They also reveal a fall in employment by 41,000 in July, which was below expectations of a 25,000 increase.
"Despite the fall in employment, all signs point to a very tight labour market," BIS Oxford Economics head of macroeconomics forecasting Sean Langcake said.
The lower unemployment rate was partly driven by the fall in the participation rate from 66.8 per cent in June to 66.4 per cent in July, he said, noting that COVID-19, school holidays and floods on the east coast dampened participation in the workforce.
KPMG chief economist Brendan Rynne said it was not surprising to see signs of easing momentum in employment given the pace of inflation and the threat of further interest rate rises.
Victoria led the drop in employment, followed by New South Wales and Queensland.
CommSec chief economist Craig James said the job market remained tight despite the fall in employment, with roles still hard to fill and job vacancies just shy of 14-year highs.
"It is possible that the jobless rate could fall to the 'early threes' or even late 'twos' - jobless rates near three per cent," he said.
He said this would put upward pressure on wages and complicate the Reserve Bank of Australia's efforts to tame inflation.
Employment Minister Tony Burke said the link between low unemployment and higher wages had weakened.
"So effectively the hydraulic pressure of unemployment being low putting upward pressure on wages, that pressure's still there, but now it's coming through in pipes that have all sorts of leaks coming out of them."
Mr Burke said his government had already started closing these loopholes by advocating for a boost in the minimum wage and improving protections for gig workers, and was now focused on firing up bargaining.
Opposition employment spokeswoman Michaelia Cash said it was alarming to see the drop in the participation rate and the loss of 86,000 full time jobs.
She called on the government to allow older Australians to work more without affecting their pensions.
The ABS also released data on Thursday showing average weekly wage and salary earnings rose by 1.9 per cent in the year to May, to $1769.80.
Meanwhile, the RBA will set up a panel of private-sector economists and meet with it at least twice a year, in a bid to gain broader insight into the economy.
The central bank will also lift the number of attendees at meetings of its panel of academics, which will also meet at least biannually.
The first meeting of the panel of private-sector economists is planned for October 6 and the meeting of the academic panel will be held on September 27.
Australian Associated Press
