THE OECD has questioned whether Australia's labour market is in as good a shape as we think, saying a lack of choice and financial incentive is forcing many Australians to make do with part-time jobs.

THE OECD has questioned whether Australia's labour market is in as good a shape as we think, saying a lack of choice and financial incentive is forcing many Australians to make do with part-time jobs.

In its annual Employment Outlook, the Paris-based Organisation for Economic Co-operation and Development says Australia's relatively low unemployment rates the eighth lowest in the OECD last year coexist with poor performance in other areas.

In unusually sharp comments, the OECD highlights a series of flaws in Australia's labour market. It says:

Australia has "a large pool of under-employed workers", who want to work full-time but can find only part-time jobs.

The clawback of means-tested benefits as incomes rise has the perverse effect of locking people into part-time work with part-timers losing up to 70 or more in every extra dollar they earn to the government.

Australia's overall employment rates are worse than the unemployment figures suggest, because 25 per cent of those with jobs are working part-time, and 21 per cent of people of prime working age (25 to 54) have no job at all.

The OECD figures show that Australia's employment rate the percentage of the population with a job ranks only 20th of the 27 rich OECD countries for prime-age workers.

In 2009, 14 per cent of Australian men aged 25 to 54 had no job, and 28 per cent of women.

By contrast, Australia had the fifth-highest employment rate for younger workers, and was a rapidly improving ninth-best for older ones.

But the OECD's main focus is on Australia's very high rate of part-time employment, the third highest in the OECD.

"Despite having a lower than average unemployment rate, overall slack in the labour market is actually higher than the OECD average," the report says. "This includes a large pool of underemployed workers . . . as well as many people who have given up looking for work."

Fifty years ago, only 2 per cent of Australian men aged 25 to 54 had given up looking for work. But last year almost 10 per cent of men in the prime of their working lives had dropped out of the workforce.

"More broadly, part-time workers in Australia often have poor financial incentives to move into full-time work," the OECD says, because all benefits in the welfare system are means-tested, and are clawed back as incomes rise.