The unemployment rate has shot up to a 13.5 year high, increasing the chances of a second Reserve Bank interest rate cut in March.
Australia's unemployment rate rose to 6.4 per cent in January from 6.1 per cent in December, a result that was worse than market expectations.
The total number of people with jobs fell by 12,200 in January, and full-time employment fell by 28,100, the Australian Bureau of Statistics said on Thursday.
JP Morgan economist Tom Kennedy said it was a "shocking report all round".
"There was not a lot of good news in this report," he said.
"It really does suggest that the Australian labour market is still softening and that's a trend we think will continue over the next few months, pushing the unemployment rate towards 6.5 per cent and maybe a little bit higher.
Mr Kennedy said the sharp rise in the unemployment rate makes the chances of a Reserve Bank interest rate cut in March a closer call, after it reduced the rate to 2.25 per cent in February.
"At this stage the data has been quite mixed, we had some pretty strong housing numbers yesterday, but then we get this January jobless number, so it is a very fine balancing act," he said.
"At this stage we think May is more likely than March, but March is going to be a live meeting in terms of market pricing and expectations."
ANZ senior economist Riki Polygenis said the unemployment rate will stay elevated for an extended period and will rise above 6.5 per cent.
"While new labour demand is holding up, it is not enough at present to offset retrenchments in particular industries such as mining and manufacturing or to keep up with the flow of new workers," he said.
"We expect a further rate cut in the first half of 2015, most likely at the next board meeting in March."
National Australia Bank senior economist David de Garis said the disappointing figures pointed to another rate cut in coming months.
He said employment growth is not keeping up with population growth.
The economy was creating about 15,000 jobs per month, for an annual rate of 1.5 per cent, but the working age population was growing at an annual rate of 1.75 per cent, leading to an inevitable rise in unemployment, he said.
"After two strong employment growth numbers, we've had some statistical payback," Mr de Garis said.
"If you've got growth in the working age population of 1.75 per cent and you're only creating jobs at 1.5 per cent, then you're going to have some people who won't be lucky enough to find a job.
"It's consistent with another easing in monetary policy over the next few months."