The Labor Department’s unemployment rate has been declining in recent months, reversing last year’s uptick, but an alternate measure tells a different story.
In July, the official rate dipped to 4.1%, down from 4.2% in June and 4.5% in November. This coming Friday, the August jobs report will come out, and Wall Street expects the rate to hold steady at 4.1% while payrolls expand by 50,000, rebounding from a surprise loss of 23,000 in July.
Despite weak job gains lately, the Labor Department’s metric for joblessness has been falling as retiring baby boomers and President Donald Trump’s immigration crackdown shrink the overall labor market.
In fact, the breakeven rate of employment growth, or the number of net new jobs needed each month to keep the unemployment rate steady, actually went slightly negative during the summer and fall of 2025. And economists expect that to happen again in 2028, meaning the economy would have to shed workers to keep unemployment steady.
Meanwhile, jobless claims have also remained low, continuing a low-hire, low-fire labor market, as businesses stay cautious amid Trump’s tariffs and war on Iran.
The official unemployment is so low that Federal Reserve policymakers see it as a signal the economy is at or near full employment. Fed Chairman Kevin Warsh said as much during his speech in Jackson Hole, Wyo., on Friday.
As a result, the Fed’s attention is now fixed on fighting inflation, instead of the other part of its dual mandate, namely supporting the labor market.
But the Ludwig Institute for Shared Economic Prosperity doesn’t have such a rosy view on the workforce. It has a True Rate of Unemployment that measures the “functionally unemployed,” who include the jobless, those involuntarily working part-time, and those earning a poverty wage.
That score saw its fourth consecutive increase in July, contrasting with the official jobless rate that has been steadily declining this year. The share of the labor market that’s functionally unemployed is now at 24.9% and has climbed 1.3 percentage points since March.
Similarly, LISEP’s measure of the percentage of the working-age population not functionally employed — including those who dropped out of the labor force — hit 53.8%, up 0.8 percentage points since the start of the year.
“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,” LISEP Chairman Gene Ludwig said in a release on Aug. 20.
The functional unemployment rate for Black workers was flat at 27.3% last month, and increased 0.6 percentage points to 23.8% for white workers, while it fell 1.5 percentage points to 26.7% for Hispanics.
For men, the rate dropped 0.9 percentage points to 19.5%, but for women, it jumped 1.6 percentage points to 31%, marking the highest level since March 2021 when the economy was still recovering from the COVID shock.
Some of the demographic differences could reflect several cross currents in the economy. The AI boom has sparked massive demand for construction and workers in skilled trades, traditionally male-dominated jobs. At the same time, a crisis in family-care services has forced many women to pull back from their careers.
“In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer,” Ludwig said. “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.”
Written by Jason Ma for Fortune as “The official jobless rate is so low the Fed thinks the economy is at full employment. But a gauge of the ‘functionally unemployed’ keeps climbing” and republished legally through syndication agreement with Reuters Connect.
