The weak job market is getting worse, with opposition politicians and union groups calling the latest rise in unemployment "dire" and "alarming", and the Government blaming the Canterbury quakes.
Unemployment rose in the three months ended June 30 to 6.8 per cent - up from 6.7 per cent in the March quarter - when most economists had expected a decent fall.
Canterbury seems to be the problem region, with a big drop in jobs in the past three months more than offsetting a lift in the March quarter.
"This was a genuinely weak labour market report," Westpac economists said.
The New Zealand dollar fell sharply, almost half a cent against both the US and Australian currencies to US81.2c and A76.9c respectively.
ASB Bank economist Jane Turner said the overall level of employment was "considerably weaker" than expected, with jobs down 0.1 per cent when the average market expectation was for a rise of 0.4 per cent.
ASB said it now expected the Reserve Bank to hold official interest rates at 2.5 per cent until June 2013, instead of earlier expectations of March next year.
The jobs weakness was driven by a 6.6 per cent quarterly fall in jobs in Canterbury, according to ASB's estimates, after a promising lift of more than 5 per cent in the March quarter.
Further jobs had been expected in Canterbury given recent building consent figures pointing to a ramp-up in rebuilding after last year's earthquakes.
But the latest figures suggest the economic boost from the Canterbury rebuild is yet to show up in more jobs.
While Canterbury's job market was weaker, employment in the rest of the country was slightly stronger than expected, up 0.8 per cent. There was also a surge in hours worked, up 1.7 per cent in the quarter, Statistics New Zealand said.
Most economists had expected unemployment to drop to 6.4 per cent or 6.5 per cent. Unemployment figures have been highly volatile in the past couple of years, rising to almost 7 per cent in late 2009 after recession and the global financial crisis hit, and bouncing between 6 per cent and 7 per cent since then.
"Today's Household Labour Force Survey portrayed a labour market that continued to tread water at best. Unemployment ticked up, against expectations of a small drop," Westpac economists said.
However, full-time employment was up 0.8 per cent, while male part-time employment was down sharply. Even this growth in full-time employment was little more than payback for an unusual decline in full-time employment over the second half of last year, Westpac said.
"Employment growth slowed in the year to June 2012, with 2000 fewer people in work in the June quarter," Statistics NZ industry and labour statistics manager Diane Ramsay said.
The rise was split evenly between men and women.