A new economic analysis suggests that nearly one-quarter of U.S. workers are "functionally unemployed," a metric that accounts for wage levels and part-time status. The Ludwig Institute for Shared Economic Prosperity (LISEP) reported that its True Rate of Unemployment stood at 24.9% in July. This figure includes individuals who are jobless, those working part-time involuntarily, and those earning poverty-level wages.
The report comes as the official U.S. unemployment rate, which measures people over 16 without jobs who are actively seeking work, reached 4.1% in July. LISEP Chairman Gene Ludwig stated that while the official rate remains low by historical standards, the "functional unemployment" rate has risen for four consecutive months. Ludwig noted that workforce participation is also trending lower, which he suggested may indicate the labor market is losing strength.
Other economists, however, have questioned the utility of the LISEP metric. Gregory Daco, chief economist at EY-Parthenon, told CBS News that an unemployment rate in the 20% range does not align with current U.S. economic data. Daco attributed recent job market shifts to employers moderating wage growth to control costs and ensure they are paying for specific skills at preferred price points.
The analysis highlighted a gap between wage growth and inflation. In July, the Consumer Price Index rose at an annual pace of 3.4%, while wages increased by 3.2% annually. Data also showed that employers unexpectedly cut 23,000 jobs during that month. Daco noted that when income growth remains near zero after adjusting for inflation, it limits the capacity for consumer spending, which accounts for two-thirds of U.S. economic activity.
This trend impacts household budgets and the broader economy by potentially reducing consumer demand. A worker earning poverty-level wages or seeing their income growth stagnate relative to 3.4% inflation will notice a decrease in purchasing power for essential goods and services. Daco explained that this forces households to make difficult choices about spending, which serves as a drag on the overall economic pace. If the trend of rising functional unemployment continues alongside falling workforce participation, it may signal that available jobs do not meet the financial needs of the population.
The analysis establishes a precedent for looking beyond "headline" unemployment numbers to assess economic health. By including those working part-time involuntarily and those with poverty-level wages, the metric suggests a different labor market reality for lower-income earners compared to the 4.1% official jobless rate. The next steps for the labor market depend on upcoming monthly reports; Ludwig stated that four months of rising functional unemployment "begin to tell a story" of weakening conditions. The Federal Reserve and policymakers typically monitor these labor and inflation figures to determine future interest rate and economic policies.