The U.S. Bureau of Labor Statistics (BLS) reported the big news on Friday. The nation's unemployment rate, seasonally adjusted, dropped from 9.8 percent to 9.4 percent between November and December, the sharpest decline in more than twelve years. Nonfarm payroll jobs continued to rise, though by a modest 103,000 after seasonal adjustment. The numbers, of course, made headlines.

Unfortunately, a closer look at the December data reveals a darker picture.

There are times when a drop in unemployment is bad news and a rise is good news. When the job market is weak, jobseekers sometimes leave or postpone entering the work force because of poor prospects, causing the unemployment rate to fall. At other times, in a strengthening job market, the hopefuls waiting on the sidelines become encouraged and enter the labor force in large numbers and push up the unemployment rate.

Between November and December the labor force participation rate fell by 0.2 point, a significant drop that occurred among men, women, and teenagers. If the participation rate had remained at its November level of 64.5 percent, given the reported rise employment, the unemployment rate would have fallen by only 0.1 point, to 9.7 percent. (Such a small change would be within the standard error of the unemployment series.) Reflecting the decline in labor force participation, another measure of unemployment did change significantly last month - "hidden" unemployment. It rose.

Total employment in the household survey recorded a 297,000 increase in December. However, the rise was within the monthly standard error range for that series, which means technically there was no significant change.

Since last June, payroll jobs have bumped along, rising by an average of only 17,000 a month - a poor showing. On the plus side, private sector job growth in the second half of 2010 perked up, rising by an average of 126,000 a month, but not by enough to both absorb population additions to the work force and cut into unemployment. Last month it was the negative effect of labor force disappearance that lowered unemployment. It's likely the jobless rate will bump up next month, partially or wholly correcting for the aberrant December drop.

As for the significance of the 103,000 increase in payroll jobs in December, it's a marginal call. The Labor Department uses a 90 percent confidence level to determine the statistical significance of month-to-month changes in the seasonally adjusted data. The minimum change the BLS estimated to be statistically significant for nonfarm jobs last month was 101,000 - just slightly short of the estimated 103,000 rise. But as the BLS writes in footnotes, the monthly statistical error range for nonfarm jobs "is an approximation." There are also job revisions coming down the road starting next month, so whether the December increase survives is a toss-up.

Since the trough of the business cycle in June 2009, payroll jobs have risen by only 72,000. In contrast, the more comprehensive measure of civilian employment collected by the household survey declined by 537,000 in the recovery (based on data smoothed by the BLS for the disrupting effects of population control revisions).

The picture becomes slightly worse when the household employment numbers are adjusted to be consistent with the definition of the payroll data. (In the adjustment, agricultural employment, self employment, unpaid family and private household workers, and workers absent from jobs without pay are subtracted from total employment and multiple jobholders are added in). According to the adjusted data, jobs have fallen by 585,000 since the end of the recession. But there's also positive news. Household measured employment has leveled off in recent months and the prospects for a respectable rise this year look good.

If the job market of late has not done as well as we had hoped or superficial reporting has led us to believe, that should not be taken as an invitation for more budget-busting government spending. Economic growth is picking up and further strengthening of the job market will follow. Employment typically lags cyclical upturns. Importantly, job growth will be given a boost by the recently approved extension of the Bush tax cuts and a cut in payroll taxes. Now let markets do their work.