Analysts say the fall in the unemployment rate for the last quarter was due to a sharp decline in employment.
Westpac economists Dominick Stephens and Felix Delbruck said the Household Labour Force Survey threw up another oddball assessment of the market with a fall in unemployment, but a sharp decline in employment.
The economists say the net result was negative market reaction but they are sceptical of the survey results and their assessment is that the labour market is still weak.
The unemployment rate fell 0.4 of a percentage point to 6.9% in the December quarter, as the number of people leaving the workforce fell faster than the number of jobs available.
In the September quarter the unemployment rate jumped sharply from 6.8% to 7.3% and the economists believe this quarter's results represent a correction from that figure.
"We don't think the labour market has suddenly improved.
"The surprising part of the December HLFS was a 6% decline in part-time work, which caused a 1% decline in overall employment. However, this was matched by the largest ever recorded decline in the labour force participation rate, from 68.4% to 67.2%."
"We find the sharp drop in part-time employment implausible. When participation and employment move sharply in the same direction, it may be an indicator of surveying issues."
ASB economist Daniel Smith said the drop in Q4 was entirely due to the largest ever quarterly decline in the participation rate and employment fell for the third quarter in a row.
But Smith said the employment story is not straightforward with the fact that full-time employment rose a little taking some of the sting out of the headline number.
He said increased employment in Canterbury and Auckland ties in with better activity indicators and housing markets in those two centres.
"The weakness in employment was focused in other regions, with particularly noticeable declines in Bay of Plenty and Wellington."
And Smith said the picture is mixed across industries with a large drop of nearly 9% in the agriculture, forestry and fishing category. Manufacturing and education and training employment was also fairly soft.
"The reported weakness in employment - the second negative surprise in a row - will reinforce that interest rates are on hold for a while further."
Unions say it is a major failure of our economy that 163,000 people are unemployed.
Council of Trade Unions secretary Peter Conway says that unemployment is very damaging for those who are out of work and the effects spill over to their families and communities.
He said the 42,000 additional people opting out of the labour force is a major concern.
"It is not just about ageing but also the record exodus to Australia and despondency of those looking for work."
The CTU is urging the Government to focus more on job creation such as ensuring New Zealand firms get a fair chance to bid for major manufacturing projects to create local jobs. And it wants more funding for research and development, export marketing, and venture capital to create jobs.
FIRST Union says unemployment is still stubbornly high and the government needs to face up to the jobs crisis. General secretary Robert Reid says 163,000 workers and their families are being let down by a government with a hands off approach to both job retention and creation.
"The recent bombshell for workers at Summit Wool Spinners and Mainzeal illustrates that what economic recovery we have had since the Global Financial Crisis, has largely been a jobless recovery.
"Retail employs over a quarter of a million workers in New Zealand. Every shop we speak with has workers who are seeking more hours, because their current hours do not provide enough income to live on," Reid said.
Labour says Kiwis are opting out of looking for work in National's stagnant economy.
Finance spokesperson David Parker says disappointed Kiwis are giving up on John Key's brighter future and heading to Australia.
"All across New Zealand there are tens of thousands of New Zealanders looking for work. Just last week 190 jobs were lost at Summit Wool Spinners in Oamaru - a desperate blow to the community," said Parker.
"We need an economy that creates jobs through exporting and modern manufacturing.
"The only part of the country with significant job growth is Canterbury, due to a tragedy and insurance inflows rather than any policy from the Government."
And the party's employment spokesman, Su'a William Sio, said one year on from. John Key's election promise that 170,000 new jobs would be created over four years, the reality has been altogether different and the economy has actually shed 30,000 jobs.
"Instead of creating work, National's hands-off economic mismanagement has destroyed jobs."
Youth Affairs spokesperson, Megan Woods. says the so-called 'focus' on youth unemployment has been shown up as a PR stunt with today's figures showing the number of young Kiwis not in education, training or work has gone up yet again.
"Statistics show there is now 90,000 young people not working, not studying or not in any training. Over 30 per cent of 15 to 19 year olds are unemployed. That is shocking."
NZ First says if the 50,000-plus trans-Tasman annual exodus suddenly stopped because of an Australian recession our unemployment rate would go through the roof.
And the Green Party said the latest figures offer little solace for record numbers of New Zealanders out of work.
"The slight fall of unemployment from record levels is little to get excited about given that 163,000 real people remain without jobs and are struggling to get by," co-leader Russel Norman said.
"Behind these numbers hide the faces of our economic failure.
"The 200 newly out-of-work Oamaru mill workers will find it difficult to find new jobs in the current environment of high unemployment especially as manufacturers are closing up shop due to the high New Zealand dollar."
Norman said the Oamaru mill was founded in 1881 and had survived eight economic recessions and two depressions - including the Great Depression - but couldn't survive the current economic settings.
"Something major has to change with National's economic approach because it's simply failing workers and the families who depend on them for their livelihoods."