The participation rate fell to 66.6 per cent from 66.7 per cent in February, according to official labour force data from the Australian Bureau of Statistics.
"With employment falling by around 7000 people and the number of unemployed rising by 21,000 people, the unemployment rate rose to 3.8 per cent," ABS head of labour statistics Bjorn Jarvis said.
Economists were generally expecting the jobless rate to climb to 3.9 per cent and around 7200 jobs to be added to the economy.
The bureau noted the small drop in employment in March followed a larger-than-usual flow of people into jobs in February and weakness throughout December and January.
"However, in March, the flows into employment had returned to a more usual pattern," the ABS said.
Mr Jarvis said the labour market remained "relatively tight" in March, with an employment-to-population ratio and participation rate still close to their record highs in November 2023.
To keep the unemployment rate steady at a time of strong population growth, Australia needs to be adding around 33,000 jobs a month.
After an unexpectedly firm February labour force report, analysts were watching the latest figures for confirmation of a trend.
A hot labour market points to resilience in the economy and could pose complications for the Reserve Bank's fight against inflation.
The central bank expects the jobless rate to soften gradually as the economy slows in response to higher interest rates, reaching 4.3 per cent by December 2024 and 4.4 per cent by the end of 2025.
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