The unemployment rate rose to a six-year high 5 per cent in the March quarter, but that was a smaller rise than economists forecast as more people than expected dropped out of the workforce.

The rate, which increased from a revised 4.7 per cent in the previous three months, has risen for five consecutive quarters from a low of 3.5 per cent in the December 2007 quarter.

The latest quarter was the first time since March 2003 that the rate has reached 5 per cent.

ANZ said the rise in the unemployment rate was limited by the number of workers leaving the labour force.

Signs of a "discouraged worker effect" were developing, although some workers may have decided to leave the labour force altogether, along with indications many were taking the opportunity to upskill.

With the economy having been in recession since the start of 2008, it was somewhat surprising that a larger rise in unemployment had not been recorded given recent overseas experience, ANZ said.

A large disconnect between employment growth and gross domestic product figures suggested firms had been hoarding labour, but the unemployment rate was likely to continue rising through the year.

At the same time, ANZ said it had to respect indicators pointing towards stabilisation, with so-called economic green shoots which seemed to be sprouting for now.

Although it did not expect those green shoots to take hold, forecasting for now contained a heavy element of uncertainty.

ASB economists Jane Turner and Nick Tuffley said clear evidence remained of under-utilisation in the labour market and they expected employment to be further scaled back during the next year.

The unemployment rate may ultimately approach 8 per cent, they said.

The ASB economists expected the participation rate, which had declined from a record high 69.1 per cent in the December quarter, would continue to decline as the labour market became more challenging.

The loss in part-time jobs was consistent with the bulk of lost jobs coming during the past year in the younger age groups - 15 to 19-year-olds and 20 to 24-year-olds, they said.

The drop-off in employment in those two age groups also may explain the drop in participation, as they were also more likely to opt for further training or tertiary education should finding a job become more difficult.

- NZPA

Source: NZ Herald (www.nzherald.co.nz)

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