Unemployment has fallen to levels last seen almost seven years ago.

New Zealand is more than just dairy prices, Economic Development Minister Steven Joyce said on Wednesday, after a surprise sharp drop in unemployment.

Unemployment fell sharply to 5.3 per cent in the December quarter, from 6 per cent in the September quarter, taking it to the lowest rate since March 2009.

It surprised economists who were expecting a figure of about 6.1 per cent.

Employment was also solid, up 0.9 over the quarter, an additional 21,000 jobs. That lifted the annual employment growth rate to 1.3 per cent and confirmed recent surveys of employers' hiring intentions.

READ MORE:

* Unemployment may rise

* Unemployment may have peaked - ANZ

* Migration expected to stay strong, stoking unemployment - Westpac

Wage inflation was low, up 1.5 per cent in the last year, a level not seen since March 2010.

Joyce said it was particularly gratifying to see strong falls in unemployment in many regions.

Tourism and education were booming, construction's strength was spreading and there was growth in other areas like ICT, beef, wine, horticulture and manufacturing.

"I think it probably points out that, not withstanding we've got challenges in the dairy sector, that actually New Zealand is much more than dairy, and we've got a much broader range of industries," Joyce said.

Statistics New Zealand said employment was especially strong for 20 to 29 year olds, with 26,800 more people in that age group hired over the year, a number of them in construction.

Nationally, construction created 27,500 more jobs last year, followed by 20,800 extra jobs in the technician and trade worker category.

But the biggest difference to the unemployment figures was not the rise in employment but a steep drop in workforce participation.

It fell 0.3 percentage points to 68.4 per cent of the working age population, thanks to a lift in the number of people retiring or at home for reasons other than childcare.

"Taken at face value, this report suggests that the New Zealand labour market is in better shape than we gave it credit for," Westpac senior economist Anne Boniface said.

However, because it was unusual to see employment grow when workforce participation was falling, economists warned it could be a statistical quirk.

"Wage pressures remain weak, and are slowing. This suggests that there still exists a degree of slack in the labour market and that wage inflation will remain slow for some time yet," said ASB economist Nick Tuffley.

Infometrics' Mieke Welvaert said that although she believed the figures overstated the strength in the labour market, it also confirmed that the previous quarter's figures had exaggerated its weakness.

"With export prices falling and global uncertainty rising, further declines in the unemployment rate are unlikely during 2016."

Joyce, who is also Tertiary Education, Skills and Employment Minister, was also pleased to see lower levels of Pacific, Maori and youth joblessness.

Pacific unemployment was its lowest in seven years and the youth "not in employment, education or training" (NEET) figure was the lowest since September 2008 at 10.9 per cent.

The NEET figure for 15 to 19 year olds was even lower, at 6.5 per cent, the lowest since records began in 2004.

"If you look behind that, it's actually more people in education and that's encouraging because we've put a lot of programmes together - trades academies, youth guarantee, the youth services - to ensure that 15 to 19 year olds don't fall out of the education system."

Speaking before the figures came out, Prime Minister John Key said employer confidence was on a high.

"If you look at what we've seen out of the current data, hiring intentions are very strong at the moment," Key said.

"We've seen that indication that employers are wanting to take on more staff, the economy's been creating jobs at quite a rapid rate, and we have the third-highest employment rate in the developed world.

"The issue really with the household labour force survey, and the way it measures the unemployment rate, is a buoyant economy attracts more people to look at it, and sometimes that can effectively, through participation, push up that employment rate."