Morici: Unemployment Rises, More Quit Looking for Work

Employment jobs report
Andrew Harrer | Bloomberg | Getty Images

The economy added 157,000 jobs in January and unemployment rose to 7.9 percent as the economy slowed in the fourth quarter. Unemployment would have been worse had not even more adults -169,000- chosen to join the ranks of those neither working or seeking employment.

Hiring and layoffs tend to lag other economic indicators. GDP fell 0.1 percent in the fourth quarter, fears of a government shutdown slowed consumer spending in December and encouraged businesses to cut inventories. Even if the economy doesn't slip into a recession, unemployment would rocket.

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 9.9 percent, and were the participation rate the same as when President Obama took office it would be more than 10 percent.

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

(Read More: Main Street Remains Pessimistic, Sees Little 2013 Hiring)

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.

Prospects for stronger growth remain poor because virtually every wage earner is paying higher payroll taxes, and the recent budget deal raises income taxes $40 to $50 billion, annually, mostly from higher rates on families earning more than $450,000. Together, those further dampen consumer spending and aggregate demand.

On the supply side, increased business regulations, rising health care costs and mandates imposed by Obama Care, and higher tax rates on small businesses raise the cost of capital.

(Read More: Plan on Working Past Age 65? You'll Have Company)

Efforts to reduce the deficit, and avert a downgrade for the credit rating on federal debt that raised taxes and sliced spending by $200 to 300 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 13.9 million jobs over the next three years-about 363,000 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.

(Read More: Boomers' Average Nest Egg Is $500,000 Short: Study)

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. You can follow him on Twitter@PMorici1