Morici: Not Out of the Woods Yet on Jobs

Friday, the Labor Department reported the economy added 216,000 jobs in March. After adding 194,000 jobs in February, this indicates the economy is finally accomplishing momentum. First quarter growth will likely be a bit higher than 3%.

Unemployment ticked a notch lower to 8.8 % on the strength of jobs growth, and unlike past months this improvement could not be attributed to adults leaving the labor force of emigration.

These gains are in sharp contrast to weaker gains the previous 13 months, and largely resulted from stronger, potentially self-sustaining private sector jobs growth.

As measured by GDP, the economic recovery began in July 2009; however, the economy did not begin adding jobs until January 2010, and gained only 76,000 jobs a month through January 2011. Too many of those jobs gains were created by stimulus spending, temporary business services, and health care and social services, which are heavily subsidized by federal and state governments. Job gains in the core private sector-private employment less temporary business services, and health-care social services and temporary business services -- averaged only 47,000 a month.

Core private sector jobs are so important because those have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring. In March and February, this barometer of private sector vitality gained 157,000 and 183,000 new positions, respectively. Similarly strong core private sector gains will be needed to continue adding 200,000 or more new jobs each month going forward.

The jobs drought may finally be over, but important challenges remain.

Gains in the range of 200,000 a month are not enough to push unemployment down to acceptable levels. Continued dependence on foreign oil, the growing trade deficit with China, and health care and tax policies that penalize the location of businesses in the United States are responsible for slower jobs creation than has been accomplished during past recoveries and that could still be achieved.

The economy must add 13 million private sector jobs over the next three years -- 360,000 each month -- to bring unemployment down to 6%. Core private sector jobs must increase at least 300,000 a month to accomplish that goal.

The economy is expanding at a 3% annual rate and this is barely enough to hold unemployment steady, because the working age population increases 1% a year, and productivity advances about 2%. Growth in the range of 4-5 % is needed and possible to get unemployment down to 6% over the next several years.

Coming out of a deep recession, growth of 4-5% a year is certainly possible. However, continued dependence on high priced foreign oil, the growing trade deficit with China, and health care and tax policies that penalize the location of businesses in the United States are responsible for slower jobs creation than has been accomplished during past recoveries and that could still be achieved.

Simply, more jobs could be created by drilling for more domestic oil now, which would keep money here that American drivers send to the Middle East; taxing dollar-yuan conversion to offset China's undervalued currency and 35% subsidy on its exports; genuine health-care reform that lowers drug, insurance administration and tort burdens rather than subsidizing a system that costs 50% more than private systems in Germany and elsewhere; and replacing the corporate income tax and elements of the personal income and social security tax with a value-added tax.

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.