Wages have edged higher in the past year but income growth remains below its long-term average and consumers are still watching their spending as a result, the Reserve Bank says.
Improvements in the business sector and the jobs market pushed household income up by 2.8 per cent in the year to March, the RBA says in its latest Statement on Monetary Policy, released on Friday.
However income growth remains below its 20-year average of about six per cent and the resulting flatline in consumer spending growth - a key economic driver - remains a source of uncertainty for the economy, the bank said.
The RBA expects unemployment will continue to fall from its current 5.4 per cent - although at a slower rate than recorded in the past year - to five per cent by 2020, a level the bank says is equivalent to full employment across the economy.
That gradual improvement in the jobless rate will also have a gradual impact on wages growth, the central bank says.
Recent increases in the legal minimum wage and in awards will drive a near-term increase, although further improvement will be gradual.
"Wage outcomes from enterprise bargaining agreements are likely to remain a drag on overall wages growth because wages growth in new agreements, despite having picked up recently, remains below that in current agreements," the bank said.
The RBA expects the Australian economy to grow at above three per cent per annum in 2018 and 2019, helped by contribution from new gas export capacity.
RBC chief economist Su-Lin Ong said the RBA's GDP forecasts "err a little on the optimistic side" because RBC had lower expectations for domestic consumption spending.
"More importantly, we also think that a persistent period of well above trend growth is needed to lift wages and inflation given the degree of slack in the economy," Ms Ong said in a research note.