Social Development and Employment Minister Paula Bennett said the Treasury's downside scenario was for unemployment to peak at 9.8 percent in the second half of next year, which would mean 217,000 people out of work.
On the other hand, she told MPs, the New Zealand Institute of Economic Research expected unemployment to reach 7.8 percent in March 2011, which would mean 176,000 out of work.
The current unemployment rate is 5 percent -- 115,000 people -- compared with the 22-year low of 3.5 percent in December 2007.
"The New Zealand labour market has weakened less than in many other countries," Ms Bennett said.
"This has been due to the sharp fall in interest rates and the exchange rate, a relatively large economic stimulus and the banking system being less affected by the financial crisis than elsewhere."
Ms Bennett said the labour market lagged behind the economy.
"So while economic activity is expected to start rising later this year, the labour market will continue to ease until 2010." Ms Bennett said the Treasury and the Reserve Bank expected economic activity to start rising in the December 2009 quarter, although growth would be mild.
She said increasing labour productivity was vital to lifting living standards and the Government treated it as a priority.
"Productivity will have to rise to around 3.2 percent a year to catch up with income levels in Australia by 2025, assuming Australia grows at the average of the last 10 years, which was 1.7 percent," she said.
