Australia's unemployment rate has returned to a five-year high but economists say widespread job shedding doesn't appear to be the major cause.

The rise in the jobless rate to 5.7 per cent in May is instead being blamed on an increase in the number of people looking for work in the month and strong population growth.

The figure, which was in line with market expectations, has risen to match the unemployment result of March, which was the highest since September 2003.

The economy shed just 1,700 jobs in May, well below the market forecast of a 30,000 decline.

The slide in total employment comprised of a 26,200 fall in full-time jobs and a 24,500 increase in part-time jobs.

National Australia Bank senior economist David de Garis said firms were, for the moment, holding on to staff.

"The rise in the unemployment rate is coming from growth in the labour force and a steady participation rate," Mr de Garis said.

"While the leads and lags between the slowdown in the economy and its impact on the employment market can be quite variable, these data continue to suggest that there is labour hoarding going on."

The participation rate - those aged 15 years and over either in work or looking for work - climbed 0.1 percentage points to 65.5 per cent in May, the Australian Bureau of Statistics (ABS) said on Thursday.

It remained above Treasury forecasts included in last month's federal budget, which predicted a participation rate of 65.25 per cent in the June quarter of 2009.

The participation rate typically falls when employment growth slows.

ANZ Banking Group economist Riki Polygenis said the Australian labour market was faring much better than some private-sector surveys suggested.

"While unemployment is rising, this is largely due to increasing participation in the labour force and population growth outpacing growth in employment," Ms Polygenis said.

Ms Polygenis said the stronger-than-expected jobs report was encouraging news for the economy, particularly for household spending and retail sales.

The jobless rate of 5.7 per cent came after a surprising, but small, fall in the unemployment rate in April.

Australian Chamber of Commerce and Industry acting chief executive Greg Evans said the labour market was proving "remarkably resilient" in the face of the worst global recession since the Great Depression.

But Mr Evans tipped further retrenchments in the months ahead.

"It remains a concern that the worst impact of the global recession is yet to be felt," Mr Evans said.

"The scale of the expected slump in business investment will make it difficult for the economy to avoid additional job losses."

Treasury forecasts show the unemployment rate reaching 8.25 per cent in the June quarter of 2010, before rising further to a peak of 8.5 per cent in 2011.

AMP Capital Investors chief economist Shane Oliver said those predictions were now too pessimistic.

"I was in the camp that said maybe nine per cent (unemployment), but now I'm thinking maybe 7.5 per cent will be the peak," Dr Oliver said.

NSW, Australia's most populous state, had the highest unemployment rate at 6.4 per cent, followed by Victoria at 5.9 per cent and Tasmania at 5.7 per cent.

The jobless rate was 5.4 per cent in South Australia and 5.3 per cent in Queensland.

WA had Australia's lowest unemployment rate in May at 4.9 per cent.