As bad as the U.S. employment picture looks, the official Labor Department figures understate the magnitude of the crisis.

Creating private-sector jobs -- not adding to government payrolls -- is the key to achieving a genuine recovery. But employment statistics define the private sector far too broadly. The numbers include too many industries in which demand, and therefore employment, depends heavily on subsidies.

Health care is responsible for most of the over-count -- which can be estimated with some confidence using Labor Department data -- with social-service providers and private education institutions also contributing to the problem.

The latest jobs report for May shows just how badly these sectors distort the employment figures. According to the Labor Department, private businesses added 83,000 jobs compared with April levels, falling far short of forecasts. (Figures for both months are still preliminary.) By subtracting the 34,000 jobs added in the health-care, social-service and education sectors, the number of new private-sector positions shrinks to just 49,000.

Since the recession officially ended in June 2009, the disparity has been much wider. Private-sector employment grew by a seasonally adjusted 980,000 in the last two years. That pales beside the 7.7 million private-sector jobs lost during the recession, but at least optimists can call it a start.

Yet after subtracting the subsidized private-sector totals, this modest employment recovery becomes positively dismal: Almost 8.4 million genuine private-sector jobs were lost during the recession, and only 291,000 have been regained.

Numbers Rise Slightly

The May employment report showed that private-sector positions represented 83.1 percent of all nonfarm jobs, up slightly from 82.7 percent at the recession’s end. But when the economic contraction began in December 2007, the private sector accounted for 83.8 percent of total U.S. employment.

The longer-term trends are even more striking. Using the official definition and March data (ensuring that all figures are final), the private sector’s share of total employment since 1950 has fallen to 83.1 percent from 86.2 percent -- a 3.6 percent drop. Using the more realistic definition, the true decline went to 67.9 percent from 81.4 percent, for a 16.6 percent plunge.

Obviously, these figures should be taken with a few grains of salt. The fields of medicine, education and social services, while heavily subsidized, are not nationalized, so not all those jobs can be called public-sector ones.

Reclassifying Jobs

At the same time, the Labor Department doesn’t include health insurance, pharmaceutical manufacturing or medical- and surgical-equipment jobs under the health-care sector. Instead, it classifies all of those positions under insurance or manufacturing. If counted under health care, the true private-sector employment picture would shrink even more.

Given the huge subsidies for housing, many construction jobs arguably should be removed from the private-sector category, too. Then there’s the Defense Department and agencies dealing with homeland security, which don’t have a Labor Department category. But corporate data and widely accepted estimates about the defense subcontracting workforce indicate that it numbers at least half a million.

As a result, factoring in the government’s influence on insurance, manufacturing, national security and homebuilding would further reduce the number of unsubsidized private-sector jobs.

Serious Retooling Needed

The worse-than-expected private-sector employment creation shows that the government’s recovery strategy needs serious retooling. The starting point should be a stronger emphasis on reviving domestic manufacturing because private industry dominates the national trade flows that must be rebalanced to reduce America’s exorbitant debts. Manufacturing’s historical record of generating high-wage jobs and technological innovation is also matchless.

Given manufacturing’s heavy exposure to frequently subsidized foreign competition, overhauling U.S. trade policy is essential. Sanctions to combat China’s currency manipulation are needed, as are stricter “Buy America” rules for government procurement, to replace imports with domestic products.

Whatever the policy choices, they are sure to be sounder with better data. Even in prosperous times, flying blind is no way to manage an economy. Nowadays, it could be positively disastrous.

(Alan Tonelson is a research fellow at the U.S. Business and Industry Council, which represents almost 2,000 domestic manufacturing companies. He is the author of “The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade Are Sinking American Living Standards.” The opinions expressed are his own.)

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To contact the writer of this op-ed: Alan Tonelson at tonelson@usbusiness.org.

To contact the editor responsible for this op-ed: Paula Dwyer at pdwyer11@bloomberg.net.