BUSINESSDESK: New Zealand's unemployment rate expectedly rose in the second quarter as the pool of jobs shrank for the first 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%, 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%. The number of unemployed people rose 1.1% to 162,000.

The number of people employed shrank 0.1% to 2.23 million, short of the 0.3% growth forecast by economists. The participation rate fell 0.3 percentage points to 68.4% after swelling to a three-year high in the March quarter, lower than the forecast 68.6%.

The number of people not in the labour force rose 1.1% 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.

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% quarterly increase in total actual hours worked to 73.8 million. Still, that was down 0.4% 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.

Employers turned around their reliance on part-time staff in the quarter, with a 3.4% fall in people working shorter hours to 511,000, while at the same time increasing full-time jobs 0.8% to 1.72 million.

The level of under-employed, 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% as more people stopped looking for work, while Canterbury's rate of joblessness increased 1 percentage point to 6.5% as the number of employed people dropped by almost 19,000.

Wellington's unemployment rate increased 0.3 percentage points to 6.4% 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% was the highest in the country, followed by 7.4% in Manawatu-Wanganui and Auckland. Taranaki had the lowest rate at 3.8%.

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% from 13.5% in the March quarter.

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