Today the Department of Labor released its December jobs report highlighting the creation of 157,000 jobs in the payroll survey and a 5.4 percent unemployment rate. Overall, 2004 was the strongest year for job creation since 1999, with over 2.2 million new jobs created.[1] It is hard to recall that as recently as the fall of 2003, many feared that the country was mired in a 'jobless recovery.' How different things look today now that the economy has created new jobs in each of the last sixteen months. Since President Bush enacted his 2003 tax cuts, the country's base of payroll jobs has increased by 2.5 million and the unemployment rate has dropped from 6.3 percent in June of 2003 to 5.4 percent last month. The lesson to learn is easy: Lower taxes on capital and labor spur gains in employment.

December Highlights

The establishment survey came in strong again. Payrolls were up 157,000 jobs in December-close to Wall Street's expectation. To give that some context, December was the fifth straight month in which payroll growth exceeded 100,000. But that's not all: Today's report revises upwards the number of new jobs created in October and November by 9,000 and 25,000, respectively.

Adding it all up for the year, job growth in 2004 exceeded 2.2 million new jobs. In other words, 2004 was the strongest year for job growth since 1999, when 3 million jobs were created at the very apex of the dot-com boom.

The unemployment rate in December remained at 5.4 percent, essentially unchanged since June. But that's still down from 5.9 percent in December 2003, a decline of 9 percent. The average unemployment rate for 2004 was approximately 5.5 percent, down from about 6 percent in 2003. Today's 5.4 percent unemployment rate is very low historically speaking.  Indeed, it is lower than the average unemployment rate in the 1970s, 1980s, and 1990s. What this means is that a larger proportion of Americans who wanted to find work were able to in 2004 than in any recent decade.

Doomsday Predictions Proven Wrong

In 2003, many believed that the United States was stuck in a jobless recovery and that the jobs that disappeared in the 2001 recession would never return, unlike after previous recessions. These pessimists offered a number of negative theories to explain slow growth in jobs. They said that too many companies were outsourcing jobs, that the President's tax cuts somehow cost jobs, and that things were only going to get worse. Many economists, however, disagreed and explained that job growth consistently lags economic recovery following a slowdown. In hindsight, the economists were right.

In fact, after President Bush's tax cuts sparked the economy, job growth sped up, riding the wave of business expansion. Since the 2003 tax cut went into effect, 2.5 million new jobs have been created. There's no sign that this expansion will stop any time soon. The year of 2005 already looks to be a strong one for economic growth, and job growth is sure to follow along.

Getting Back to Work

Though it has been severely underreported, the past year has been much better for Americans suffering bouts of unemployment. While it is never good to be involuntarily unemployed, in 2004 it was easier than before to get back to work. The median duration of unemployment dropped by a week in 2004, from 10.4 weeks in December 2003 to 9.5 weeks in December 2004. And the number of the long-term unemployed-those seeking work who have been unemployed for over fifteen weeks-declined by over 250,000 workers. The long-term unemployed also declined as a proportion of the unemployed from 40.2 percent to 36.6 percent. These shifts mean that the unemployed are able to find jobs more quickly in 2004 than they were in 2003.

Conclusion

The past year was a solid one for the U.S. economy and the U.S. worker and the best year for job growth since 1999. Today's job growth numbers-both for December and for the whole year-are a reflection of the great success of the President's tax cuts. By reducing taxes on capital and labor, the President's cuts encouraged business investment and expansion. This, in turn, sparked job growth and helped many Americans return to work. The gains from the President's tax cuts are still coming in.

As the President and Congress consider proposals to overhaul the current tax code, they should favor tax reforms that encourage economic growth. Reducing taxes on labor and capital and lessening tax-code distortions will cause the U.S. economy to grow faster and produce more new jobs, as the President's rounds of cuts have so aptly demonstrated. In 2005, Congress should make permanent the President's 2001 and 2003 tax cuts. Permanence would be a strong first step in tax reform and would help ensure robust economic growth for the duration of the President's second term and beyond.

Alison Acosta Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies, and Rea S. Hederman, Jr., is Senior Policy Analyst in the Center for Data Analysis, at The Heritage Foundation.