America’s headline unemployment rate is falling, but a broader measure of labor market health is moving sharply in the opposite direction, complicating the picture facing policymakers and businesses.
The official US unemployment rate declined to 4.1% in July, yet the Ludwig Institute for Shared Economic Prosperity, or LISEP, calculated functional unemployment at 24.9%. Its measure includes people without jobs as well as workers who cannot secure full-time hours or earn above a poverty-level wage. The divergence raises questions about how much strength the conventional unemployment rate is capturing.
Functional Unemployment Climbs to 24.9%
The Labor Department’s unemployment rate fell from 4.2% in June and 4.5% in November. Wall Street expects August’s figure to remain at 4.1%, according to the source report, while payrolls are forecast to increase by 50,000 following a loss of 23,000 jobs in July.
Recent employment growth has been weak, but changes in the size of the available workforce have helped keep the unemployment rate low. Baby boomer retirements and tighter immigration enforcement under President Donald Trump have reduced labor supply, meaning the economy requires fewer additional jobs to prevent unemployment from rising.
That unusual dynamic has already pushed estimates of breakeven employment growth, the monthly job creation required to maintain a stable unemployment rate, below zero for periods during 2025. The source report said economists expect the measure could turn negative again in 2028.
The picture from LISEP is considerably less favorable. Its True Rate of Unemployment increased for a fourth consecutive month in July, reaching 24.9%, 1.3 percentage points above its March level.
Another LISEP measure, covering the proportion of working-age Americans who are not functionally employed and including people outside the labor force, reached 53.8%. That was 0.8 percentage points higher than at the beginning of 2026.
LISEP chairman Gene Ludwig warned on Aug. 20 that rising functional unemployment alongside declining participation could indicate weakening conditions that headline unemployment figures fail to capture.
Women See the Sharpest Increase in Labor Stress
The differences become more pronounced when the LISEP figures are broken down by demographic group.
Functional unemployment among Black workers remained at 27.3% in July. The rate for white workers increased by 0.6 percentage points to 23.8%, while the Hispanic rate declined by 1.5 percentage points to 26.7%.
The gender gap was larger. Functional unemployment among men fell by 0.9 percentage points to 19.5%, while the rate for women increased by 1.6 percentage points to 31%. That was the highest reading for women since March 2021, when the US economy was still recovering from the disruption caused by the pandemic.
Several economic forces may be contributing to that split. Heavy investment connected with artificial intelligence has supported demand for construction and skilled trades, areas where employment remains disproportionately male. At the same time, shortages and rising pressures in family-care services can make continued workforce participation more difficult for women.
The broader implication is that labor market tightness and worker prosperity are not necessarily the same thing. An economy can maintain a low official unemployment rate while a significant share of workers remain underemployed or unable to earn enough from available work. For employers, that distinction matters because headline labor scarcity may coexist with a large pool of people seeking better hours, wages or opportunities.
The Fed’s Inflation Focus Faces a Labor Market Test
The contrasting indicators also matter for monetary policy. Federal Reserve policymakers regard the low official unemployment rate as evidence that the economy is at or close to full employment. Federal Reserve Chairman Kevin Warsh reinforced that assessment during his Jackson Hole speech on Friday, according to the source report.
That gives the central bank greater room to concentrate on inflation, the other side of its dual mandate. But a persistent rise in broader measures of labor distress could make that assessment more difficult if it begins appearing in other indicators such as participation, wage growth, hiring or consumer spending.
The next major test will be the August employment report. Investors will be watching more than the 4.1% headline forecast. Payroll creation, participation and subsequent revisions will help determine whether America’s low unemployment rate reflects a genuinely resilient workforce or an economy where slower labor supply growth is masking deteriorating employment opportunities.
