Unemployment Drops as Many Adults Quit Labor Force

The economy added 120,000 jobs in November, and unemployment fell to 8.6% from 9% in October.

It's probably closer to 18%.  Job growth in the range of 120,000 should be expected to accommodate labor force growth, but not a much-lower unemployment rate -- especially not by nearly half a percentage point.

However, the scarcity of jobs is causing many professional to establish home-based businesses that really don’t provide full-time employment but do take workers off the unemployment rolls. Also, many adults have quit looking for work altogether, and the adult labor force participation rate fell sharply in November. Working-age adults not participating in the labor force -- those neither employed nor looking for work -- increased by 487,000 in November. Strong gains were notched in retailing, warehousing and transportation, health care and social services, and temporary business services. Gains in other activities were quite lackluster or nonexistent; for example, manufacturing added only 2,000 jobs. Construction shed 12,000 jobs and information technology lost about 4,000. Gains in manufacturing production are not matched by improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange rate situation with the Chinese yuan. Government employment fell by 20,000, as private sector jobs added 140,000. The private sector less the heavily subsidized health care and social services sectors, and temporary businesses services, only added 94,000 jobs. Those gains in core private sector employment must increase dramatically if the economy is to halt the decline in real wages and provide federal, state and local governments with adequate revenues, and that is not happening fast enough. The economic crisis in Europe and mounting problems in China’s housing sector and banks worries U.S. businesses about a second major recession and discourages new hiring. The U.S. economy continues to expand but is quite vulnerable to shock waves from crises in European and Asia. Factoring in those discouraged adults and others working part time for lack of full-time opportunities, the unemployment rate is about 15.6%.  Adding college graduates in low-skill positions, like counterwork at Starbucks (NASSDAQ:SBUX), and the unemployment rate is likely closer to 18%.  Prospects for lowering those dreadful statistics remain slim. The economy must add 13.1 million jobs over the next three years -- 364,000 each month -- to bring unemployment down to 6%. Considering continuing layoffs at state and local governments and federal spending cuts, private sector jobs must increase about 375,000 a month to accomplish that goal. Growth in the range of 4-5% is needed to get unemployment down to 6% over the next several years. The second half of 2011, the economy has been growing at about 2%, and that pace is expected to continue through 2012. Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus spending, large federal deficits, expensive and ineffective business regulations, and costly health care mandates do not address structural problems holding back dynamic growth and jobs creation -- the huge trade deficit and dysfunctional energy policies. Oil and trade with China account for nearly the entire $550 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending. Simply, dollars sent abroad to purchase oil and consumer goods from China, that do not return to purchase U.S. exports, are lost purchasing power. Consequently, the U.S. economy is expanding at 2% a year instead of the 5% pace that is possible after emerging from a deep recession and with such high unemployment. Without prompt efforts to produce more domestic oil, redress the trade imbalance with China, relax burdensome business regulations and curb health-care mandates and costs, the U.S. economy cannot grow and create enough jobs.Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.