New Zealand's unemployment rate expectedly rose in the second quarter as the pool of jobs shrank for the time since December 2010. The kiwi dollar dropped on speculation a weak labour market gives the central bank more room to cut interest rates.

The unemployment rate increased 0.1 percentage points to 6.8 per cent, the highest since June 2010, according to Statistics New Zealand's household labour force survey. Economists surveyed by Reuters were expecting the headline rate to come down to 6.5 per cent. The number of unemployed people rose 1.1 per cent to 162,000.

The number of people employed shrank 0.1 per cent to 2.23 million, short of the 0.3 per cent growth forecast by economists. The participation rate fell 0.3 percentage points to 68.4 per cent after swelling to a three-year high in the March quarter, lower than the forecast 68.6 per cent. The number of people not in the labour force rose 1.1 per cent to 1.1 million.

The New Zealand dollar dropped to 81.17 US cents from 81.56 cents immediately before the figures were released. The trade-weighted index fell to 73 from 73.25.

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The employment data "will be read by the market as opening the door for (the) RBNZ to ease (though we doubt it, bar a shock from Europe)," said Robin Clements, senior economist at UBS New Zealand.

The overall fall in employment, combined with a growing working-age population, resulted in a decrease in the employment rate, Statistics NZ said in its report.

The survey comes after separate government figures this week showed employers added to their payrolls and needed more paid hours in the second quarter.

Today's figures showed a 0.5 per cent quarterly increase in total actual hours worked to 73.8 million. Still, that was down 0.4 per cent from the same period a year earlier.

New Zealand's labour market has been struggling to recover after the worst recession in two decades came during the global financial crisis, and a series of earthquakes in Canterbury destroyed the country's second-biggest city.

Still, employers turned around their reliance on part-time staff in the quarter, with a 3.4 per cent fall in people working shorter hours to 511,000, while at the same time increasing full-time jobs 0.8 per cent to 1.72 million. The level of underemployed, which measures people in part-time work seeking more hours, rose to 109,500 from 107,600 in the March period.

The number of jobless people, which includes people available but not seeking work, fell to 271,200 from 273,300.

Auckland's unemployment rate fell to 7.3 per cent as more people stopped looking for work, while Canterbury's rate of joblessness increased 1 percentage point to 6.5 per cent as the number of employed people dropped by almost 19,000.

Wellington's unemployment rate increased 0.3 percentage points to 6.4 per cent as its working age population increased to a one-year high as the region added more jobs in the period.

Northland's unemployment rate of 9.9 per cent was the highest in the country, followed by 7.4 per cent in Manawatu-Wanganui, and Auckland. Taranaki had the lowest rate at 3.8 per cent.

Westpac Bank chief economist Dominick Stephens said the release "portrayed a labour market that continued to tread water at best. Unemployment ticked up, against expectations of a small drop."

" This was a genuinely weak labour market report, and will serve as further confirmation that the economy is operating well below its capacity," said Stephens. "The Reserve Bank will feel even more comfortable with its plan to leave the OCR at its current, stimulatory level for a long while. We continue to expect no change in the OCR until July 2013."

Stephens said the "only redeeming feature" of the data was the full-time/part-time split, which showed full-time employment up 0.8 per cent, with male part-time employment down sharply.

"However, even this growth in full-time employment is little more than payback for an unusual decline in full-time employment over the second half of last year," he said.

ASB Economist Jane Turner said it was particularly concerning that the weakness in the labour market was centred in Canterbury.

"Employment in the region fell sharply, reversing out the previous quarter's recovery.

"We had expected to see some further employment growth in the region given other signs suggest the rebuild was starting to get under way."

Throughout the rest of the country, the labour market proved stronger than expected, with employment and hours worked lifting strongly, Turner said.

"However, this gain largely makes up for a very soft performance over the previous 6 months - overall the underlying recovery in labour demand remains gradual."

The Statistics NZ figures show the number of people employed in construction fell to 171,000 from 174,600 in March, while manufacturing dropped to 246,500 from 257,000. The number of professional, scientific, technical, administrative and support service jobs rose to 259,300 from 247,100.

Youths aged 15 to 24 not in employment, education or training (NEET), a target demographic for the government, fell to 13.1 per cent from 13.5 per cent in the March quarter.

New Zealand's unemployment rate was 14th lowest among OECD nations, behind the Czech Republic's 6.7 per cent, and ahead of Israel's 7.1 per cent.

-with Herald Online