Employment and wage data will dominate the week ahead, with economists' expectations of rising unemployment likely to be proven correct on Thursday.
"Recent labour indicators have been nothing short of horrendous," Westpac chief economist Brendan O'Donovan said.
Statistics New Zealand will release the latest wage data on Wednesday and March unemployment figures on Thursday.
The March 2009 quarterly survey of business opinion showed that a net 35% of firms shed staff in the March quarter, the highest ratio since September 1991.
A net 36% intended shedding staff over the next three months.
Firms reported that the ease of finding labour, both skilled and unskilled, was now the highest in more than 30 years.
Add to that the sharp decline in the latest Westpac McDermott Miller employment confidence survey and the picture became clear - labour demand had shut down, he said.
Westpac was forecasting a fall of 1.2% in employment for the three months ended March, to take annual unemployment to 5.3%.
The labour force participation rate was expected to fall to 68.7% as discouraged workers moved out of the labour force - particularly those in the under-25 and over-55 age groups.
The risk was that participation did not fall as much as expected, Mr O'Donovan said.
"These are unusual times and as we have seen in other economies, such as the US and Australia, participation has been holding up.
"This is especially the case in the 55-plus age group, where workers have seen their retirement funds slashed as asset prices have fallen.
"In many cases, these workers are finding themselves in a position where they either have to stay in or return to work - the so-called `desperate worker effect'."
If participation held up more than expected, the unemployment rate would rise further.
Even if participation was unchanged from the December quarter, unemployment would reach 6%, he said.
Wage growth was expected to continue slowing through this year in line with the strong fall in labour demand pressures and reduced inflation expectations.
The labour cost index was the most important of the two surveys being released on Wednesday.
The key data to watch for was the private sector all salary and wage rates, including overtime rates - the series preferred by the Reserve Bank.
Last quarter, the series registered an increase of 0.7% to be up 3.2% on a year ago.
Mr O'Donovan expected growth of 0.6% for March, taking the annual rate to a two-year low of 3.1%.
The quarterly employment survey was responsive to the economic cycle and was extremely volatile.
It was difficult to read much into a single quarterly result but private sector average hourly earnings were forecast to have grown by 0.7% in March.
"All up, we expect the suite of labour market data to reinforce our view that the labour market has become the next victim of the current downturn," Mr O'Donovan said.
