The U.S. labor market may be weaker than the official unemployment rate suggests, as a broader measure of joblessness continues to rise.
The U.S. unemployment rate, measured by the Labor Department, fell to 4.1% in July from 4.2% in June. At the same time, the Ludwig Institute for Shared Economic Prosperity’s broader measure of functional unemployment rose to 24.9% from 24.7%, marking its fourth consecutive monthly increase, according to a report, first noted on Fortune.
What Is Functional Unemployment?
LISEP’s True Rate of Unemployment includes people who are jobless, working part time involuntarily or earning a poverty-level wage. Its measure of the working-age population that is not functionally employed also includes people who have left the labor force.
The functional unemployment rate rose 0.2 percentage points in July and is up 1.3 percentage points since March. LISEP Chairman Gene Ludwig said, "Functional unemployment is moving higher while workforce participation is moving lower," according to the report.
"If this continues, it would suggest the labor market is losing strength despite what we may see in the headline unemployment numbers," Ludwig said.
Fewer Workers, Fewer Jobs
The latest figures come after July’s government jobs report showed a weaker labor market beneath the 4.1% unemployment rate. Employers cut 23,000 nonfarm jobs in July, while the labor force participation rate fell to 61.4%, its lowest level since February 2021.
Average hourly earnings rose 0.1% from June, below expectations, while May and June payroll figures were also revised lower.
The combination of fewer jobs and fewer people participating in the labor market helps explain why the unemployment rate can fall even when hiring remains weak.
Full-time employment also fell by 106,000 in July to 133.55 million, marking its fourth consecutive monthly decline. The total drop over those four months reached 1.11 million, while the full-time employment-to-total employment ratio fell to 82.4%.
Why The Labor Pool Is Shrinking
One explanation is that the U.S. is losing workers through retirement and lower immigration. Research from economist Laura Ullrich has projected the labor force could shrink by about 5.9 million workers, or 3.7%, between 2025 and 2032, with Baby Boomer retirements and lower immigration among the main drivers.
Mark Zandi, chief economist at Moody’s Analytics, has also pointed to weakness among both foreign-born and native-born workers. His analysis found that the labor market was struggling despite tighter immigration reducing the pool of foreign-born workers.
The shrinking workforce can create a strange labor-market picture. Employers may add fewer jobs, yet the unemployment rate can remain low because fewer people are available or actively looking for work.
Workers Are Not All Seeing The Same Picture
LISEP’s July data showed functional unemployment at 27.3% for Black workers, 23.8% for White workers and 26.7% for Hispanic workers.
The difference was also wide by gender. Functional unemployment fell 0.9 percentage points to 19.5% for men but rose 1.6 percentage points to 31% for women, the highest level since March 2021.
Ludwig said strong labor markets should draw more people into the workforce through better jobs and rising wages. "In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer," he said.
The figures do not mean the official unemployment rate is wrong. They show that the standard measure captures only part of the labor market, while LISEP’s broader measure is intended to include people who have jobs but are not getting enough hours or income under its methodology.
For the Federal Reserve, the distinction matters because the 4.1% unemployment rate can suggest the economy is near full employment, while the broader measures point to weakness in participation, full-time work and job quality.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo Courtesy: Hryshchyshen Serhii on Shutterstock.com