Nearly 25% of workers are "functionally unemployed," analysis finds

The U.S. job market may be showing signs of weakness beneath the surface, despite a low official unemployment rate. A new analysis from the Ludwig Institute for Shared Economic Prosperity (LISEP) suggests that nearly 25% of American workers are "functionally unemployed."

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We shouldn't read too much into a single month, but four months begin to tell a story. Functional unemployment is moving higher while workforce participation is moving lower. If this continues, it would suggest the labor market is losing strength despite what we may see in the headline unemployment numbers.

This metric goes beyond the traditional unemployment rate, which measures those without jobs actively seeking work. LISEP's "True Measure of Unemployment" (TRU) also includes individuals who are involuntarily working part-time or earning less than $26,000 annually before taxes. The rate of functional unemployment has been on the rise for four consecutive months, reaching 24.9% in July, a slight decrease from 25.2% in December.

Gene Ludwig, chairman of LISEP, stated that the upward trend in functional unemployment alongside a declining workforce participation rate suggests a potential loss of strength in the labor market. "In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer," Ludwig said. He emphasized the need to monitor this trend, as it could indicate a lack of desired or necessary opportunities, impacting the broader economy.

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In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer. We need to pay attention when that starts moving in the other direction. It could be a sign that people aren't finding the opportunities they want or need, which matters for the broader economy.

However, other economists urge caution. Gregory Daco, chief economist at EY-Parthenon, expressed skepticism, stating that an unemployment rate in the 20% range does not align with current economic indicators. He noted that while wages are lagging behind inflation, with wages rising 3.2% annually compared to a 3.4% increase in the Consumer Price Index in July, employers are also moderating wage growth to control costs and ensure they have the right talent.

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An unemployment rate that would be in the 20% range does not line up with anything we see in the U.S. economy.