Spain's jobless rate hit its highest level in 16 years in the last quarter of the year when the economy contracted again as the number of people out of work climbed above five million for the first time ever, more than a fifth of the working population.

According to the National Statistics Institute's (INE) latest quarterly Active Population Survey (EPA), the unemployment rate climbed from 21.5 percent in the third quarter to 22.85 percent in the period October-December. The ranks of the unemployed swelled by 348,700, while the number of people who lost their jobs during the whole of last year amounted to 577,000. The number of people out of work at the end of the year stood at a record 5.273 million.

The gloomy figures underscored the dire need for an overhaul of the labor market, a task the government wants to complete in the first quarter of this year.

"This shows that the government has to carry out a labor reform that focuses on incentivizing hiring, rather than just on cutting firing costs," Bloomberg quoted Estefania Ponte, chief economist at Cortal Consors, in Madrid as saying. "The unemployment rate could end the year at 24 percent."

The Bank of Spain estimates the economy shrank 0.3 percent on a quarterly basis in the last quarter of last year after stagnating in the previous three months. The central bank predicts a contraction in GDP of 1.5 percent as the government continues with its austerity drive to rein in the public deficit, which will give way to a modest recovery in 2013. The IMF is more pessimistic, forecasting output will shrink 1.7 percent this year and 0.3 percent to following year, with the jobless rate climbing to over 23 percent.