Greece's growing ranks of unemployed are raising the political cost of Prime Minister George Papandreou's budget cuts, providing fodder for anti-government protests amid a third year of recession.

The highest jobless rate on record is the most painful sign of an economy straining under the weight of conditions on emergency loans from the European Union and International Monetary Fund.

"New austerity measures will weigh on the labour market, either directly through a severe reduction in public sector payrolls or indirectly by weighing on the recovery," said Tullia Bucco, an economist at Unicredit Global Research in Milan.

The slumping economy has prevented Greece from reaching deficit targets prescribed in last year's €110 billion ($190 billion) bailout. The shortfall rose to 10.5 per cent of gross domestic product last year, exceeding the 9.5 per cent target set in the Government's 2011 budget adopted by the EU and IMF.

Net revenue dropped 7.1 per cent in the first five months of this year, Finance Ministry data showed.

Monthly data from the Hellenic Statistical Authority showed the jobless rate rose to 16.2 per cent in March, the highest since Greece began releasing the figures in 2004, and 4.6 percentage points more than in June 2010.

The rate for those under age 24 was 42.5 per cent, closing in on Spain's highest euro-region rate of 44.4 per cent.

The statistics office's quarterly data indicate construction was among the industries most hurt, with the number of jobs declining 21.5 per cent in the first quarter from a year earlier. "Unemployment is a huge problem as it creates social unrest and doesn't let the Government take the measures it should," said Theodore Dourmousoglou, president and managing director of Athens-based Ducasco-Dourmousoglou, a medical supplies company employing 30 people.

Ducasco-Dourmousoglou relies on the state for 90 per cent of sales and unpaid bills from the public sector are putting pressure on the company to reduce staff, he said.

"There is no way we can operate with the cash flow problem we are facing," Dourmousoglou said.

The EU agreed last week to pay the fifth instalment of last year's aid package after lawmakers approved a €78 billion package of deficit reductions and asset sales.

Greek unemployment will average 14.5 per cent this year, the EU and IMF estimate.

That may be too optimistic, according to analysts such as Piraeus Bank chief economist Ilias Lekkos.

While reducing the number of civil servants is a key demand from international lenders, the Greek constitution makes it difficult to conduct large-scale firings. The Government aims to lower the public payroll by 150,000 people in the next five years.

There were 768,009 state employees as of last July, accounting for about 17 per cent of the total working population of 4.4 million. The figure was 727,440 at the end of 2010, according to the Finance Ministry.

"The most serious threat in the Greek political scene comes from the most privileged parts of the public sector and government-sponsored companies who are fighting to maintain their preferential treatment," Lekkos said.

Job creation in the export sector, which is touted by Greek and EU officials as the silver lining in Greece's recession, is unlikely to increase enough to offset the losses in construction, retail and manufacturing.

"Export growth has helped manufacturing to maintain rather than expand employment," said Lekkos. "The tourism sector though is highly labour intensive and in certain areas of Greece, especially the islands, can cause large swings in employment in the summer months."

- Bloomberg