Can the markets handle double-digit unemployment? We're about to find out.

The Labor Department reported this morning that the unemployment rate in October edged up to 10.2% from 9.8% in September, bringing it to the highest level since April 1983. Economists had forecast a loss of 175,000 jobs in October. But employers shed 190,000 jobs. The number of unemployed Americans also rose by 558,000 to 15.7 million. "The jobless rate is obviously a shock," says Sarah Hewin, senior economist with Standard Chartered Bank in London.

Economists had expected the jobless rate to top 10% — just not this soon. Most economists figured the rate would hit double digits in early 2010 and remain there for several months. Hewin points out that the headline figure is prone to revision, and after the August and September numbers were revised upward, the three-month trend doesn't look that bad. The jobless rate is also a backwards-looking indicator and doesn’t say much about where the economy is heading.

More important are two other vital signs of the labor market — hours worked and average earnings. Weekly hours worked stayed unchanged in the report, and earnings edged up only marginally. Still, Hewin points out that overtime manufacturing hours picked up — the one "positive element" in the report. There's also a silver lining to slow wage growth: it could give the Fed confidence that inflation will stay low, allowing policy makers to keep interest rates at rock-bottom levels well into 2010.

Of course, low inflation and interest rates are cold comfort to the millions of Americans out of work or looking for a job. Economists worry that without stronger jobs growth the economy could sink into a double-digit recession. Growth next year is expected to be a modest 2.4%. And Federal Reserve Chairman Ben Bernanke said in September that the economy would have to grow "significantly faster" than its long-term rate to create enough jobs for all the people entering the labor force. Indeed, unemployment is already well above 10% in several states (including Michigan and California) and could stay high in those regions after the national rate starts to come down.

For now, though, corporate America seems to be the main beneficiary of the weak jobs market. Nonfarm productivity surged 9.5% in the third quarter, the strongest gain since 1961, reflecting a 4% rise in output, offset by a 5% drop in hours worked. Translation: Companies are squeezing more goods and services out of employees without raising wages — giving a big boost to the bottom line. According to Barclays Capital, "this is a very favorable environment for corporate profits." Though employees enduring heavier workloads, wage cuts and longer hours on the job may not be so sanguine.

This article is an excerpt from our Early Bird markets story, which was originally published the morning of Nov. 6.