June 7 (Bloomberg) -- Australian employment increased four times as much as expected in May, worsening a labor shortage that may force the central bank to raise interest rates to ward off inflation. The nation's currency climbed.

Employment rose 39,400 after gaining 34,900 in April. The jobless rate dropped to 4.2 percent, the lowest in almost 33 years, the Bureau of Statistics said today in Sydney. The median estimate of 24 economists in a Bloomberg News survey was for 10,000 extra jobs and an unchanged unemployment rate of 4.4 percent.

Traders pushed up the yield on interest-rate futures, bringing forward their expectation for an increase in borrowing costs to August from December. The jobs boom, and a report yesterday showing the economy is growing at its fastest pace in three years, add to pressure on the central bank to raise its benchmark rate, already at a six-year high of 6.25 percent.

``After the GDP numbers yesterday, this increases pressure for the Reserve Bank of Australia,'' said Brian Redican, a senior economist at Macquarie Bank Ltd. in Sydney.

The yield on the August 30-day interbank futures contract jumped 4 basis points, or 0.04 percentage point, to 6.41 percent at 4:22 p.m. in Sydney, indicating traders have upped the probability of an August interest-rate increase from 50 percent to 64 percent.

The October contract's yield surged 8 basis points to 6.50 percent, showing traders see an interest-rate increase as certain by October. The Australian dollar bought 84.72 U.S. cents, an 18-year high, from 84.39 cents immediately before the report was released.

Full-Time Jobs

The number of full-time jobs rose 66,800 in May, today's report showed. Part-time employment dropped 27,400. About 10.5 million of Australia's 21 million people are employed.

``Australia is not a big economy, and nearly 70,000 additional full-time jobs in a month is a remarkable increase,'' said John Edwards, chief economist at HSBC Australia in Sydney. ``By comparison, U.S. full-time employment would have to increase by well over a million in a single month to match it.''

The U.S. jobless rate was 4.5 percent in May and the U.K.'s was 2.8 percent. The rate in the 13 nations sharing the euro currency was 7.1 percent in April, and Canada's was 6.1 percent.

``In some parts of Australia we are in full employment, that is you cannot find people to take jobs,'' Treasurer Peter Costello told reporters in Melbourne today. Low unemployment is ``entrenched,'' he said.

Inflation Threat

Australia's hiring spree has worsened a worker shortage that may stoke wages and inflation. Wages rose a near-record 1 percent in the first quarter from three months earlier.

``Labor market tightness is likely to keep overall wages growth at a firm pace,'' the Reserve Bank said last month.

While annual inflation cooled to 2.4 percent in the first quarter, the Reserve Bank forecasts price increases will accelerate to the top of the bank's target band of between 2 percent and 3 percent by mid-2008.

The employment surge over the past year has seen the most new jobs created in 18 years. It began in the mining and construction industries as resource companies expanded to meet Asian demand amid record commodity prices.

Rising employment buoyed consumer spending and borrowing, which is now prompting retailers and banks to hire workers and open new outlets.

Australia's economy expanded 1.6 percent in the first quarter from three months earlier. Consumer spending contributed 0.9 percentage point to that rate, and consumer confidence has since jumped to a record in May.

Retailer Expands

``We want to open 14 more stores across Australia this year and that's a reflection of how positive the market is,'' said Stephen Leibowitz, executive chairman of Retail Apparel Group Pty Ltd., which owns 140 menswear stores nationwide. ``We will be out there employing.''

Commonwealth Bank of Australia, the nation's second-largest lender, last month said it will open 25 new branches and add 270 sales staff to meet rising demand. Eighty of those workers will be hired before June 30.

Australia & New Zealand Banking Group Ltd. will open 40 branches this year, it said in April. St.George Bank Ltd. is opening branches in the fast-growing mining states of Queensland and Western Australia. Westpac Banking Corp. hired 400 extra staff in the six months ended March 31.

Employment growth may continue through mid-year after jobs advertised in newspapers and on the Internet jumped 10.3 percent to a record in May, ANZ Bank reported this week.

The government is trying to ease the worker shortage by boosting its immigration intake and spending A$549 million ($463 million) extra on trade apprenticeships.

Tax cuts for low-income earners and increased child care subsidies, announced in last month's government budget, may also encourage more mothers back into the workforce, according to Treasurer Costello.

Australia's participation rate, which measures the labor force as a percentage of the population aged over 15, rose 0.1 percentage point to a record 65 percent in May.

To contact the reporter on this story: Hans van Leeuwen in Sydney at hvanleeuwen1@bloomberg.net.

Last Updated: June 7, 2007 02:46 EDT