The most troubling aspect of the August jobs report released earlier Friday could well be the revelation that 368,000 potential employees simply gave up looking for work.

Put into perspective, the number of people who decided last month that there’s no point even looking for a job was nearly four times larger than the 96,000 people who actually found jobs.

“That’s a large number. That’s the biggest story for this month,” said Cliff Waldman, an economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), a public policy and economics research organization in Arlington, Va. “It shows there’s a very, very sizable level of frustration among the labor force and it’s a very disturbing trend."

Ironically, removing such a large number of people from the workforce helped push the U.S. unemployment rate down to 8.1% from 8.3% in July, but no one is interpreting that as good news.

The Labor Department, which compiles and releases unemployment figures, didn’t indicate how many of that 368,000 figure were regarded as long-term unemployed, which the government defines as those out of work for 27 weeks or more. But it’s a safe bet a significant number of them were.

The number of long-term unemployed in the U.S., those who haven’t been able to find steady work for over six months, held steady from July into August at a whopping five million people. In all, 12.5 million people were out of work in the U.S. last month. 

The government also reported Friday that the labor force participation rate came in at 63.5%, the lowest figure since September of 1981.

Skittish Would-be Entrepreneurs Curbing Hiring

Waldman said reams of economic data show that a significant number of would-be entrepreneurs, frightened by fragile financial markets and uncertain about the direction of U.S. economic policy, are holding off on their plans to start their own businesses.

If those businesses aren’t opened there’s no need to hire new employees.

“Most new jobs come from new businesses,” said Waldman. “That’s not happening and it’s especially disturbing because there are so many people on the sidelines wondering what to do.”

Usually, when unemployment rises, by necessity it creates opportunities for entrepreneurs to go out and start their own businesses. Rather than sitting on their couches waiting for their next unemployment check, historically many Americans will instead look for a way to make money on their own. When they succeed they hire more people to help them.

But, increasingly, that’s not happening now. “We should be seeing a lot more of this but we’re not,” said Waldman.

Blame it on the deep level of frustration and uncertainty that pervades U.S. labor markets right now. Frustration because U.S. tax policy doesn’t encourage entrepreneurs, and uncertainty because of the looming "fiscal cliff" come January if Congress can’t reach an agreement on debt reduction, government spending and tax policy.

Waldman said tax-policy reform needs to focus on making it easier for entrepreneurs to get up and running so they can expand and hire. “Entrepreneurship should be very much a part of current economic policy,” he said.

Another factor holding back hiring is employer uncertainty tied to dramatic budget cuts and tax increases scheduled to take affect early next year if Congress and the president fail to reach an agreement on a compromise.

If no compromise is reached and billions of dollars are slashed across-the-board from the U.S. budget at the same time taxes go up for millions of Americans, the impact could be devastating.

“If that happens there will be a recession in 2013, and not a small one,” said Waldman.

Hardly surprising then that would-be entrepreneurs are reluctant to put their life savings on the line right now in an effort to start a new business.

Follow Dunstan Prial on Twitter @DunstanPrial