Although the unemployment rate rose to 9.9 percent, it was largely due to people re-entering the workforce in an attempt to find work (people that are unemployed for a long period of time and stop looking for work are not included in unemployment calculations), employers created 231,000 private sector jobs. Similarly encouraging, hours and wages increased.

James Sherk of Heritage explains the increase in the unemployment rate:

“The rate of job creation is not high enough to keep up with these potential workers. The increase of the unemployment rate from 9.7 to 9.9 percent is simply due to the rapid growth of the labor force and the slower rate of job creation. The unemployment rate could continue to climb if the new entrants to the labor market continue at such a brisk pace. The labor force participation rate is still well below the pre-recession level, which indicates that hundreds of thousands of workers have not yet started searching for work.”

It is the private sectors inability to create jobs that has led to such high levels of unemployment, not job loss. The below chart from Heritage compares the 2001 recession to make this point:

So, now that the problem has been identified, job creation, what should the government due to foster job growth? The government could make it easier to higher employees by reducing mandatory benefits and payroll taxes. Employers would be much more likely to hire employees if there were fewer strings attached. Secondly, the government should reassure businesses that they will not levy additional taxes or regulations. Many businesses fearful of the health care reform’s implications or the Democrat pushed energy tax are acting prudently and not hiring. The low job creation numbers are largely due to the uncertainty surrounding Congress.

Sherk’s more specific remedies:

Congress should promote more rapid job growth in this recovery. America cannot afford a repeat of the European experience. In the 1970s, Europe had relatively low levels of unemployment. Unemployment increased sharply in the early 1980s and has remained persistently high through the present day. This is in large part because of the expensive social-democratic welfare states that European nations created. These highly regulated welfare states discouraged entrepreneurship and wealth creation-and thus the incentive to create new businesses and jobs. Ten percent unemployment has become normal in Europe.

Congress should not allow 10 percent unemployment to become normal in America. Congress should jettison Keynesian ideology and instead promote job creation by encouraging entrepreneurship and new investment. Congress can do this through a combination of explicit actions and by eliminating specific, Washington-based threats to the economy. Such a no-cost stimulus would create jobs without adding to the deficit by:

• Freezing all proposed tax hikes and costly regulations at least until unemployment falls below 7 percent;
• Freezing spending and rescinding unspent stimulus funds;
• Reforming regulations to reduce unnecessary business costs, such as repealing Section 404 of the Sarbanes–Oxley Act;
• Reforming the tort system to lower costs and uncertainty facing businesses;
• Removing barriers to domestic energy production in Alaska and in Colorado oil shale;
• Repealing the job-killing Davis –Bacon Act;
• Passing pending free-trade agreements with South Korea, Colombia, and Panama; and
• Reducing taxes on companies’ foreign earnings if they bring those earnings home.

Implement these changes and watch unemployment numbers drop. Until then, we watch as our economy wrestles with Congress’ burdens.

Posted by Chris Prandoni on Thursday, May 20, 2010 3:33 PM EDT

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