SYDNEY, Oct 5 (Reuters) - Australia's central bank is uncertain about how much spare capacity exists in the labour market and how that will affect wages and inflation over time, one reason it has been cautious on changing policy rates.
The Reserve Bank of Australia's (RBA) head of economic analysis, Alex Heath, said the unemployment rate was still the main measure of spare capacity in the labour market.
"But there is more work to do to improve our ability to forecast wages growth, which is a key input into the inflation forecasts," Heath told an education conference.
"The fact that we are making decisions with a degree of uncertainty and that the economy keeps changing makes things challenging."
Wages growth has consistently undershot RBA forecasts in recent years leading to much discussion about what might have changed in the labour market to keep pay awards so subdued.
Heath said a high level of underemployed - those who would like to work more hours - suggested there was more spare capacity than the jobless rate alone would suggest.
While the unemployment rate has fallen steadily to reach a six-year low of 5.3 percent, annual wages growth remains near record lows.
There were also an estimated 1.2 million people who are classified as marginally attached workers because they would like a job and would be available to start within four weeks, but are not actively looking.
That compares to around 750,000 people who were recorded as officially unemployed because they were actively looking.