The U.S. unemployment rate fell last month to its lowest level in more than 2½ years, as a mild increase in hiring was met by an even larger increase in the number of people who simply gave up.

The Labor Department says the unemployment rate dropped sharply to 8.6 per cent last month, down from 9 per cent in October. The rate hasn't been that low since March 2009, during the depths of the recession.

Employers added 120,000 jobs last month. And the previous two months were revised up to show that 72,000 more jobs had been added — the fourth straight month the government revised prior months higher.

In the past three months, the economy has added an average of 143,000 net jobs a month

Labour force shrinks

Still, one reason the unemployment rate fell so much was because more people left the labour force than actually managed to get jobs.

Roughly 315,000 people gave up looking for work and were no longer counted as officially unemployed. "Careful with the unemployment rate drop that is getting too much attention as the main reason for its decline was labour force shrinkage," Scotiabank economist Derek Holt said.

About 13 million Americans remain unemployed. Employers began shedding workers in February 2008 and cut nearly 8.7 million jobs over the next 25 months. Since then, the economy has regained nearly 2.5 million of those jobs.

Drilling down into the data, the private sector added 140,000 jobs in total. But that gain was offset by a loss of 20,000 public sector jobs. Debt-addled U.S. governments have been paring jobs for much of the past year.

Although the private sector job gains are encouraging, more than half of them came in the retail and restaurant industry. That's a sign that holiday hiring has stepped up, but it's also a trend that's unlikely to last for very long.

The service sector added 146,000 jobs while the goods-producing industry shed 6,000 jobs.

With files from The Associated Press