The largest monthly fall in full-time employment in more than five years sits at odds with the Turnbull government's recent mantra "a job is the best form of welfare".
The number of full-time workers dropped by a hefty 53,000 in September and was only partly off-set by a 43,200 rise in part-time work.
It was the second month in a row total employment has dropped and continued a trend of shifting by employers to part-time hirings.
Labor says the figures prove Prime Minister Malcolm Turnbull's "jobs and growth" message is just a hollow slogan.
Neither Mr Turnbull nor Treasurer Scott Morrison chose to use the latest figures during question time in parliament.
While the jobless rate did decline to a three-year low of 5.6 per cent, it was the result of fewer people looking for work.
The unemployment rate for August was a revised 5.7 per cent after being originally reported at 5.6 per cent.
"The September figures clearly demonstrate the country continues to transition," Employment Minister Michaelia Cash said in a statement.
However, she was encouraged by female employment rising to a record high of 5,554,000 and the youth unemployment rate falling by 0.2 percentage points to 12.6 per cent.
Senator Cash said the overall result made it more important for parliament to pass the government's legislative agenda to encourage economic growth and job creation.
That included restoration of the Australian Building and Construction Commission and the passage of the 10-year tax plan which aims to cut the corporate tax rate to 25 per cent from 30 per cent.
Opposition employment spokesman Brendan O'Connor said claims the proposed company tax cuts could create more jobs were a "joke".
People had given up on looking for work because of a lack of confidence in the government.
"The idea that trickle-down economics works has been repudiated for 20 years," he told reporters in Canberra.
"It's only an investment banker that would think you cut taxes for multinational companies and banks to deliver for working people in this country," he added in reference to Mr Turnbull's past career.
The switch to part-time has left many workers wanting more hours of employment, known as the underemployed, and a status the Australian Bureau of Statistics gauges on a quarterly basis.
As of August the number of underemployed was 1.1 million or 8.7 per cent of the workforce, the highest level since this was first estimated in 1978.
"Underemployment, insecure work, and low wages growth are of concern to Labor because it is not good for people and it is not good for economic growth," Mr O'Connor said.
RBC Capital Markets strategist Michael Turner said one month's figures are unlikely to "rattle many cages" within the Reserve Bank.
However, a slack jobs market will continue to put downward pressure on wage growth and keep inflation muted.
"We continue to see the RBA on hold in the near term, barring an unusually low CPI outturn next week," Mr Turner said.
The consumer price index is due next Wednesday.
