Key Points:

Economists are discounting an unexpected rise in employment in the December quarter and still forecast a steep rise in unemployment this year as the recession deepens.

While the unemployment rate at 4.6 per cent was close to the median forecast of 4.7 per cent, and a hefty increase on September's 4.2 per cent, market economists were not expecting the 0.9 per cent rise in employment which was also recorded. They had picked a 0.7 per cent fall.

The household labour force survey's employment numbers are volatile, however. Movements of 1 per cent, quarter on quarter, in both directions have been the norm over the past year, and Statistics New Zealand puts the margin of error on its number, which is based on a sample of households, albeit a large one, at 1 per cent.

Even so, the employment outcome was better than expected.

But of the 21,000 additional jobs gained in the quarter, 17,000 were part-time.

Hours worked were down 1.9 per cent, following a 1.2 per cent fall in the previous quarter, and in line with a 1.4 per cent fall in paid hours recorded in Monday's quarterly employment survey - a survey of firms rather than households.

"The fall in hours worked was a shocker," Westpac economist Dominick Stephens said, "and strongly suggests economic activity fell sharply in the December quarter. We see downside risk to our already miserable minus 0.9 per cent forecast for GDP in the that quarter."

The fact that employment and unemployment both rose, and outstripped the 11,000 rise in the working age population, reflected a jump in the labour force participation rate to a record 69.3 per cent, from 68.7 per cent in September.

That is the proportion of working people (everyone over 15) who are either working or actively seeking a job and available to start one.

ANZ National Bank economist Philip Borkin said that a turn in the labour market typically means the participation rate fell as people got discouraged and withdrew from the labour force.

But this time "we suspect that given the pressure facing households more people will choose - or be forced - to remain in the workforce".

The business sentiment surveys have been recording a sharp fall in firms' employment intentions.

ASB chief economist Nick Tuffley said that as the demand for labour weakened and pay rates started to look less attractive the participation rate would start to pull back.

"The question will be just how many will remain job hunting due to financial obligations and how many will just give up." Over the past year the number of people employed rose 0.9 per cent to 2.19 million, but the number of hours worked dropped 2.8 per cent.

"There is now clear evidence of labour hoarding over the past two quarters," Tuffley said.

"This is unsurprising given how hard firms have worked over the past two years to recruit the right people in a very tight labour market."

But the economic backdrop had changed more sharply than many could imagine, he said.

"Firms are now under pressure to reduce costs, and cutting head count will be the next option."

Over 2008 the unemployment rate climbed from a record low of 3.4 per cent to 4.6 per cent, a five-year high.

"It has essentially extinguished in the space of four quarters all the heat that had built up over the previous four years," Bank of New Zealand economist Craig Ebert said.

"The labour market hasn't seen the full impact of last year's recession yet, let alone the adjustments that will need to be made in response to the internationally-driven second phase of the downturn."

Bank economists' forecasts for the unemployment rate by the end of the year range from 6.4 per cent to 7.2 per cent.

Ebert noted that much of the increase in employment over the past year had been concentrated in the older age groups (over 60).

"This raises the question of whether the oldies have been forced back into the labour market," he said.

"A lot of retirement nest eggs will have been smashed over the last six months ... and most term deposits are receiving half the returns of six months ago, and pretty much nothing after tax and inflation are taken into account."

Looking ahead
Forecasts for unemployment rate by end of this year.
* BNZ6:5 per cent
* Westpac6: 4 per cent
* ANZ National Bank: 6.6 per cent
* ASB:6.9 per cent
* Deutsche Bank: 7.2 per cent