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Why America's unemployment remains a problem

Friday, the Labor Department is expected to report the economy added 153,000 jobs in April—up from 88,000 in March—and unemployment is expected steady at 7.6 percent. This gain may prove short lived, and this pace is well below what is needed to get unemployment to acceptable levels.

New hiring lags behind broader economic growth. In the fourth quarter, GDP was up only 0.4 percent—with businesses continually improving productivity, the economy was lucky to have created any jobs at all this past winter. 

Businesses remain cautious about future demand, and reluctant to invest in new machinery, computers and software that would improve worker efficiency.

In the second quarter, GDP growth rebounded to 2.5 percent, but about 40 percent of that growth came from businesses piling up inventory—not from the final sales. Underlying demand remains weak—January tax increases limit household spending, trade deficits on China and oil continue to leak consumer dollars abroad, and sequester spending cuts reduce government purchases.

Generally, economists expect second quarter growth at 2 percent or less—about the same or less than potential improvements in worker productivity; hence, jobs creation should slow through the spring.  The unemployment rate would rise but for so many additional folks choosing not to work—663,000 in April.

Should economic growth pick up, many adults may be expected to rejoin the hunt, and the economy would have to add more than 360 thousand jobs each month for 3 years to lower unemployment to 6 percent. That would require growth in the range of 4 to 5 percent—this is possible but not likely with current policies.

Since turning the corner in mid-2009, GDP growth has averaged 2.1 percent and unemployment has fallen from 10.0 percent to 7.6 percent. 

In contrast, high oil prices and double digit interest rates pushed unemployment to 10.8 percent during Ronald Reagan’s first term; then GDP growth averaged 5.3 percent for the next three and half years, and unemployment fell to 7.3 percent.

Factors contributing to the slow pace of recovery include the huge trade deficits on oil and manufactured products from China and elsewhere in Asia—these drain demand for U.S. goods and services. Absent U.S. policies to confront Asian governments about their purposefully undervalued currencies, and to develop more oil offshore and in Alaska, the trade deficit will continue to tax growth.

The recent surge in natural gas production, and accompanying lower prices, is substantially improving the international competitiveness of industries like petrochemicals, fertilizers, plastics, and primary metals—as well as consuming industries like industrial machinery and building materials. 

However, the Department of Energy is considering proposals to boost exports of liquefied gas, which would create many fewer jobs, than keeping the gas at home.

Dodd-Frank regulations continue to make lending by regional banks to small businesses difficult. Many smaller banks have sold out or are considering consolidation with money center banks, which are less inclined to small business lending.

More onerous regulatory reviews are an increasing complaint among businesses. Government needs to subject policies to protect the environment and other goals to the same efficacy standards the market applies to commercial technologies—regulatory assessments and enforcement are needed but those must be delivered cost effectively and quickly to add value.

Many businesses look to Asia where government policies are more accommodating and prospects for growth remain stronger.

A better jobs market is simply not possible without better trade, energy and regulatory policies.

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.