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

A new analysis suggests nearly one-quarter of American workers are “functionally unemployed,” a term used to describe individuals who either lack employment altogether or are working part-time involuntarily while earning below-poverty wages. This figure comes as the official unemployment rate dropped to 4.1% in July, a level typically considered healthy by economists. However, the Ludwig Institute for Shared Economic Prosperity (LISEP) argues that traditional metrics fail to fully reflect the state of the labor market. According to the institute’s “True Measure of Unemployment” (TRU), functional unemployment, defined as those who are unemployed and seeking work, plus those working part-time involuntarily and earning less than $26,000 annually before taxes, reached 24.9% in July. This marks a four-month consecutive increase, though slightly down from 25.2% recorded in December. The data highlights growing concerns about the quality of available jobs and the adequacy of wages relative to living expenses. Gene Ludwig, chairman of LISEP, emphasized that the rise in functional unemployment signals a shift in labor market dynamics. He noted that in a strong economy, increasing employment and wage growth should encourage more people to enter the workforce. Instead, declining workforce participation suggests that many individuals are unable to find suitable employment opportunities, potentially affecting broader economic performance. Economists such as Gregory Daco, chief economist at EY-Parthenon, expressed skepticism about the significance of the TRU measure. Daco pointed out that an unemployment rate in the 20% range does not align with current economic indicators. He highlighted that wage growth has moderated, reflecting employers’ efforts to manage costs and ensure they hire appropriately skilled workers at reasonable prices. In July, employers unexpectedly cut 23,000 jobs, falling short of economists’ expectations and indicating possible slowdowns in the job market. Despite the low official unemployment rate, many Americans continue to face challenges due to high inflation. The Consumer Price Index increased at an annual rate of 3.4% in July, while wage growth was recorded at an annual rate of 3.2%. This disparity between inflation and wage increases has led to muted consumer spending, which accounts for two-thirds of U.S. economic activity. Daco explained that subdued wage growth affects consumer spending power, as companies’ wage bills directly influence individual incomes and subsequent spending habits. With income growth stagnating after adjusting for inflation, households are forced to make tighter financial decisions, which can slow the overall economic pace. This situation underscores the complex interplay between labor market conditions and broader economic trends. The findings from LISEP and the contrasting views from other economists illustrate the nuanced nature of assessing labor market health. While traditional metrics like the unemployment rate provide a snapshot of joblessness, alternative measures attempt to capture the broader context of employment quality and economic stability. As discussions continue, the implications of these varying perspectives will likely shape future policy and economic strategies aimed at addressing the underlying issues affecting the workforce.