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Behind the December jobs report -- why America's unemployment rate remains so high

2012 Job Growth

The economy added 155,000 jobs in December, down a bit from 161, 000 in November.
Unemployment was steady at 7.8 percent, largely because few of the millions of discouraged workers did not begin seeking work.

Fears regarding the so-called "fiscal cliff" contributed to the continued slow pace of jobs creation; however, the overall picture is worse than these headline figures reveal and will remain difficult until the policy fundamentals change.

In the weakest recovery since the Great Depression, most of the reduction in unemployment from its 10.0 percent peak in October 2009 has been accomplished through a significant drop in the percentage of adults working or looking for work. Were adult labor-force participation the same today, the unemployment rate would be 9.7 percent.

Convincing millions of Americans they don’t want a job or compelling desperate workers to settle for part time work has been the Obama administration’s most effective jobs program.

Adding in part time workers who would prefer full employment but can’t find it, the unemployment rate becomes 14.4 percent. It rose above 14 percent in the wake of the financial crisis and remains stuck there.

Convincing millions of Americans they don’t want a job or compelling desperate workers to settle for part time work has been the Obama administration’s most effective jobs program.

Growth remains weak, as most of the pickup to 3.1 percent in the third quarter was attributable to increased federal spending inventory build and a temporary surge in exports. Consumer spending and business investment weakened, substantially, and goods piled up warehouses—either in the fourth quarter or early next year, inventories will be adjusted and growth will slow. Exports will slow as Europe’s recession continues, and government spending will likely be curtailed in the upcoming debt ceiling negotiations.

Higher payroll taxes for all Americans, and higher income taxes for families earning more than $450,000 a year will hit small businesses very hard, as most are organized as limited liability corporations, the income of those entities pass through to personal income tax returns and will be taxed at the new higher rates.

Going forward U.S. GDP growth could easily dip below 2 percent. A deal to raise the federal debt ceiling taxes and slices spending by $200 to 250 billion, immediately, could send the economy into a recession and unemployment to above 10 percent.

The puzzle of reducing federal deficits to sustainable levels and accomplishing stronger growth and jobs creation, consistent with the underlying potential of the economy, remains difficult, because the $500 billion trade deficit on oil and with China continues to drag on demand and a tighter regulatory climate makes businesses cautious about investing in the United States.

The economy would have to add about 12.9 million jobs over the next three years—about 358,000 each month—to bring unemployment down to 6 percent. That would require GDP growth in the range of 4 to 5 percent.

Without better regulatory and trade policies, it is simply not possible to accelerate growth, create enough jobs and bring down federal deficits—all at the same time.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.