NSW opposition leader Jodi McKay is expected to face further questions over the viability of her leadership after Labor’s loss in the Upper Hunter by-election.

Labor conceded defeat on Sunday, with Ms McKay and ALP candidate Jeff Drayton calling their Nationals counterparts to congratulate them.

A devastated Ms McKay said the result had left many people within the party shell-shocked.

“We thought that people would hear our message,” she said.

“We didn’t expect that our vote would go to independents; we didn’t expect our vote to be torn away as it was.”

Ms McKay admitted Labor needed to do some “really genuine soul-searching” but flagged she would not resign.

She said blaming her leadership would be a cop-out and would not address the fundamental structural issues facing Labor.

“There’s no challenge against me. I am the leader and we will work through what we need to do,” she said.

Nationals candidate David Layzell had claimed about 30 per cent of the first preferences from more than 41,000 votes counted by Sunday afternoon.

Mr Drayton was next on 21 per cent, with the One Nation and Shooters, Fishers and Farmers Party candidates following on 12 per cent.

It represents a significant swing against the opposition, which got 28.6 per cent of first preferences in the 2019 state election.

Federal politicians also weighed in on the result on Monday, with Prime Minister Scott Morrison saying Labor had completely lost touch with blue collar workers.

But Finance Minister Simon Birmingham was more circumspect.

“It was a state byelection and I would treat it as such,” he told ABC radio on Monday.

“It had a range of different factors at play and certainly many of them were very much local, very much state politics.”

Joel Fitzgibbon, the federal ALP member for the Hunter, said the result was devastating for the party.

He said Labor needed to be more vocal in its support of working class people.

“When your supporters leave you it takes a long time and a lot of effort and you need to be very clear to win them back,” he told Sydney radio 2GB.

“We have been at best whispering. We have tried to walk both sides of the fence on issues like work and on the other side, the environment. They’re suspicious and sceptical.

“Federally, if Labor can’t persuade not just mine workers but everyone in those regions whose jobs are dependent on mining, that we stand with them; you can expect a similar result whenever Scott Morrison goes to the polls.”

NSW Nationals leader John Barilaro said the result was an indictment of Labor, although argued the problem did not lie with Ms McKay’s leadership.

“She’s just a jockey, the horse is broken,” he told Sky News.

Premier Gladys Berejiklian said early in the campaign the Coalition would need a miracle to win the seat and avoid being plunged further into minority government.

Though the Nationals have held it for the past 90 years, Upper Hunter has become marginal and governments traditionally do not do well in by-elections.

The race was sparked when sitting Nationals MP Michael Johnsen stepped down over allegations he had solicited sex in parliament and revelations he is under police investigation for sexual assault.

The final vote count will not be known for days, with postal votes returning as late as Wednesday.

-with AAP