Unemployment rate weaker than it appears: Goldman's Hatzius

After government unemployment numbers disappointed Wall Street, Jan Hatzius, chief economist at Goldman Sachs, told "Squawk on the Street" on Friday that he was most let down by the labor force participation rate, which makes the overall unemployment number weaker than it appears.

Weakness in the jobs report centered on areas like transportation and health care, he said, but it's hard to determine how much of an effect the sequester had on these numbers. "Clearly, the sequester has had less of an impact than I would have thought three or six months ago."

However, "none of the things we're looking at are particularly good, with the exception of the headline unemployment rate drop. I don't think it's a disaster on any particular dimension, but on balance it is disappointing," Hatzius added.

Job growth continued in July as the U.S. economy added another 162,000 positions—enough to keep the recovery theme going but not a level likely to have a major effect on monetary policy. The number missed economist expectations of 184,000 and caused some movement in markets.

(Read more: So-so summer: Job growth disappoints; rate drops)

"There's also, of course, still a weak labor market so there's still a lot of involuntary part-time unemployment so that's definitely an important aspect of the overall underemployment that we've got," Hatzius said.

"The broad notion that we've got a weaker labor market than the 7.4 percent unemployment rate would suggest by itself, that's extremely important. You can look to part-time employment and maybe even more importantly you can to the labor force participation rate, which partly is coming down for structural reasons."

"A very important part of the decline that we have seen over the past five years, I think, is cyclical," Hatzius added. "I think that's a very important consideration when you think about the policy implications, and something, of course, that the Fed is very well aware of."

(Related: Small businesses want more from Obama's tax proposal, groups say)

According to Hatzius, the "underlying reality" behind the noisy month-to-month jobs numbers "looks broadly stable" and is "at a pace that is not particularly rapid." He also explained that the Fed is getting "a little less enthusiastic" about its program of quantitative easing and expects that the central bank will balance the effect of tapering asset purchases with stronger forward guidance.

Hatzius also said that he expects the Fed to execute on the strategy of tapering in September, combined with a strategy of stronger forward guidance on its plans on QE in the context of labor force participation and inflation expectations. This expectation has moved up from early June, when Hatzius expected tapering to commence in December.

Of the candidates to succeed Chairman Ben Bernanke, Hatzius said that either Lawrence Summers or Janet Yellen would be a good choice and that they both view the economy through "a similar lens," where government policy must be "more imaginative" in boosting growth.

—By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from "Squawk on the Street" @ToscanoPaul