Rhode Island shed another 1,700 payroll jobs last month and the state unemployment rate jumped three-tenths of a percentage point to 7.7 percent –– the highest since 1993, a government report released today shows.

Government payrolls last month shrank by 700 — the biggest drop of any sector — driven primarily by a stampede of state employees retiring as the fiscal year ended June 30, the state Department of Labor and Training reported. (More state jobs are expected to disappear in the coming weeks as state employees leave in order to avoid paying a higher share of their health insurance premiums effective Oct. 1.)

So far this year, Rhode Island’s payroll job losses are estimated at 10,200 — compared with the 7,900 jobs lost by the end of 1990, as the state entered the banking crisis.

Edward M. Mazze, the distinguished university professor of business administration at the University of Rhode Island, predicts that 2008 will “end up on the record books” as one of the worst labor markets in the state’s history. But he expects the economy to shift next year.

“I think the bleeding is going to stop in early 2009,” said Mazze, the Rhode Island forecaster for the nonprofit New England Economic Partnership. “I call it guarded optimism.”

The state’s effort to solve its budget problems, Mazze said, along with the upcoming national election and the attention both candidates are focusing on the economy are helping business people he talks with become “more optimistic.”

That optimism, however, has so far failed to boost payrolls.

Nationally, federal labor officials reported that employers eliminated 51,000 payroll jobs last month, and the national unemployment rate rose from 5.5 percent to 5.7 percent.

This week, the nation’s fourth-largest bank, Wachovia Corp., announced it will cut another 600 jobs, and Ford Motor Co. said it will cut 300 jobs. Meanwhile, more Americans than expected last week filed initial claims for unemployment benefits — evidence of persistent labor market weakness.

“The job market is still weakening,” said Jeffrey Roach, chief economist at Horizon Investments in Charlotte, N.C. “We’re going to see continuing claims numbers continue to rise and that’s certainly disconcerting.”

In Massachusetts, the improvement in hiring during the spring has tapered off this summer. The Bay State reported a 2,900 job loss last month, after a revised estimate of a 3,000 job gain in June. Massachusetts’ unemployment rate last month remained ticked down one-tenth of a percentage point, to 5.1 percent, according to the Massachusetts Office of Labor and Workforce Development.

Connecticut reported payroll jobs last month fell by 1,000 and the state unemployment rate rose three-tenths of a percentage point, to 5.8 percent.

In Rhode Island, the number of employed residents in the state has declined by 18,200 from July of last year, and the number of unemployed — those without jobs who report actively seeking work — rose by 15,300 during the same 12 months, the state reported.

The state’s unemployment rate has climbed 2.7 percent during the last 12 months, and the size of the labor force — residents with jobs plus those without jobs who are actively seeking work — shrank by 2,900.

The labor force tends to shrink when the economy is contracting, as people either leave the state to find work or give up searching for work, a phenomenon that economists call the “discouraged worker” effect.

The competition for jobs also is likely to grow, Mazze said, with so many state employees taking early retirement going back into the work force.

“What the state has probably created is a lot of ‘1099’ employees for private industries” whose health and retirement benefits are paid by the state, Mazze said. “They’re now very attractive to small and medium-sized biz who can’t afford benefits.”

(Employers who hire workers as “contractors” rather than payroll employees are not required to pay benefits.)

In addition to the 700 government jobs lost last month, employers eliminated 200 jobs each in construction, financial activities, professional and business services, and accommodation and food services. Wholesale trade, information, and health care and social assistance also reported job losses of 100 each.

Educational services was the only sector last month to report any job growth, adding 100 jobs.

—With reports by Bloomberg News

larditi@projo.com