The national jobless rate unexpectedly dropped in August as the recovery from the recession continued, offsetting the weakness in locked-down Victoria.
The jobless rate fell to 6.8 per cent in August from 7.5 per cent in July, when economists had expected a further rise to 7.7 per cent.
There was also another large rise in the number of people employed overall, disguising a drop in Victoria where the unemployment rate rose to 7.1 per cent.
"These numbers are encouraging," Treasurer Josh Frydenberg told reporters in Canberra on Thursday.
But he wan't getting carried away by the result, saying Australians are still doing it tough due to COVID-19.
"We are in the middle of a once-in-a-century pandemic and the biggest economic shock since the Great Depression," he said.
He said the effective unemployment rate - not published by the Australian Bureau of Statistics - also declined from 9.8 per cent to 9.3 per cent.
"But it still remains high," Mr Frydenberg said.
This rate takes into account people who are officially unemployed but also those who have either left the labour force or have seen their hours reduced to zero.
He said the focus of his budget on October 6 would be getting people back to work.
Despite the latest drop, the official jobless rate remains well above the 5.1 per cent in February when coronavirus first hit Australia's shores.
Employment rose by 111,000 in August, the third month of exceptionally strong increases as restrictions were generally unwound across the nation, although there was a 42,400 drop in Victoria.
The number of full-time positions rose by 36,200 nationally, while part-time jobs increased by 74,800.
The ABS noted a big increase in the number of sole traders finding work.
Some 458,000 people have been added to the workforce in the past three months, just over half of the jobs lost in April and May.
Opposition employment spokesman Brendan O'Connor says while the latest figures are welcome, he is concerned the figures will result in the government taking away much-needed stimulus.
The government insists it will be winding back the JobKeeper wage subsidy and the enhanced JobSeeker dole payment.
"Our fear is that we will see a decline in employment and an increase in unemployment and underemployment if they take away billions of dollars to provide support for businesses and workers in our economy," Mr O'Connor said.
The Reserve Bank and Treasury have both predicted the unemployment rate will rise to 10 per cent by the end of the year with a further 400,000 people joining the dole queue.
"The fall in the unemployment rate suggests that the peak at the end of the year may be lower than current estimates," BIS Oxford Economics chief economist Sarah Hunter said.
But she says with the participation rate still comparatively low and underemployment rate remaining above 11 per cent, it shows there is much spare capacity in the labour market.
"(This) will weigh heavily on wages growth for at least the next year," Dr Hunter said.
The better-than-expected jobs result came as the Organisation for Economic Cooperation and Development predicted a slower recovery for Australia from its first recession in nearly 30 years.
The OECD expects a smaller contraction of 4.1 per cent in 2020, compared to the five per cent contraction it forecast in June.
However, for 2021 it now sees growth of just 2.5 per cent rather than 4.1 per cent. This is still below Australia's long-run growth average of 2.75 per cent.
Australian Associated Press