Australia lost a further 227,000 jobs between April and May, resulting in a total loss of 835,000 jobs in seasonally adjusted terms since March and a 0.7% jump in unemployment to 7.1%.

The Australian Bureau of Statistics released the data on Thursday, revealing the Covid-19 contraction has slashed the jobs of women and young people in particular, while the unemployment rate is suppressed by near record-low participation and three million Australians whose jobs are supported by the jobkeeper wage subsidies.

The figures intensified the political debate about how to handle the expiry of jobkeeper in September and whether Australians are best supported by wage subsidies or the jobseeker unemployment payment, doubled to $1,100 with the coronavirus supplement.

The government stressed at the peak of the Covid-19 crisis that a wage subsidy was required to keep workers connected to their jobs while the economy entered a period of hibernation, but Scott Morrison is now signalling the welfare system is the way to help Australians into “real jobs” during the recovery. The prime minister said the government was awaiting further data before deciding how best to balance the programs.

After unemployment jumped from 5.3% to 6.2% in April – since revised to 6.4% – a further 85,700 Australians lost their jobs in May. The proportion of people aged 15 years and over in jobs has shrunk from 62.5% to about 58.7% in two months.

Morrison told reporters in Canberra that “while devastated” he was “sadly not surprised” by the figures, warning Australians to brace for more job losses in the months ahead.

“These are our dark times, but I can see that ray of light,” he said, referring to resumption of economic activity after restrictions eased in late May and early June.

Australia’s economy shrank by 0.3% in the March quarter, guaranteeing an end to its record 29-year run of economic growth when combined with an even worse negative result anticipated in the June quarter, as it suffered the largest contraction since the Great Depression.

The ABS said the jump in unemployment was reduced from an effective rate of 11.3% by people leaving the labour market. The participation rate fell by 0.7% to 62.9% – the lowest since January 2001.

Monthly hours worked fell 0.7% in May, to be down 10.2% since March. Bjorn Jarvis, the head of labour statistics at the ABS, said it is believed 2.3 million – or one in every five employed people – had either lost their job (700,000) or had fewer hours of work than usual (1.55 million).

The underemployment rate decreased by 0.7% in May to 13.1%, but remained 4.3 points above March. The underutilisation rate, which combines the unemployment and underemployment rates, rose to a new record high of 20.2%.

Morrison acknowledged that “the unemployment rate … does understate where things are on the ground” and reiterated it would take at least two years of growth to restore the economy to its size before Covid-19.

The treasurer, Josh Frydenberg, said that women had lost 118,000 jobs, 52% of the jobs lost in May, while youth employment was down by 103,000, with young people accounting for 45% of jobs lost in May.

Earlier in June the Treasury secretary, Steven Kennedy, told the Senate’s Covid-19 committee it had updated its forecast to suggest Australia was on track for 8% unemployment in the September quarter, down from expected peaks of up to 10%.

Asked whether the government would seek to keep Australians tied to their current job with jobkeeper, or retain jobseeker at more than $40 a day to support them while looking for work, Morrison said the government was “wrestling” with the question and awaiting further data, including the treasury review in June.

The government will deliver its response in late July – which Labor has noted is after the Eden-Monaro byelection, suggesting it has “secret plans” to cut jobkeeper.

Some backbenchers have argued that jobkeeper encourages people to collect $1,500 fortnightly payments not to work and the survival of “zombie businesses” that may not be profitable, while others oppose returning jobseeker to its pre-Covid level of $40 a day, given 1.7m Australians are now on the payment.

Weighing the merits of the payments, Morrison noted that “jobseeker is the place where, if you have lost your job … you can connect to other employment services”.

Morrison said the government’s income supports and industrial relations settings must “maximise the number of people that we can keep in real jobs going forward”.

Morrison signalled that the government was continuing to work up industry-specific support packages for the arts and entertainment and tourism industries.

Kennedy has warned the government to focus on jobs creation and not public debt, while the Reserve Bank governor, Philip Lowe, has said the jobkeeper program may need to continue beyond September to prevent the economy going off a cliff.

On Thursday Labor used question time to ask about job losses if jobkeeper expired. The shadow treasurer, Jim Chalmers, warned that any attempt to curtail the payment would be a “recipe for disaster”.

Chalmers told reporters that any attempt to end jobkeeper early would be to “fast forward towards misery”, tipping workers “off wage subsidies and into Centrelink queues”.

Chalmers said the government should stick to its “original instinct” to maintain workers’ connection to their jobs to ensure a “shallower downturn” and an easier path to recovery.

Labor also seized on the rate of youth unemployment – 16.1% – which the shadow employment minister, Brendan O’Connor, said was “unprecedented”.

Morrison suggested the government would create jobs through reform of skills education, investment in infrastructure and “deregulating our economy” and energy policy including getting “gas for a gas-fired recovery which supports manufacturing”.