Memorandum
- From
- Connor Quincy via Fortune | FORTUNE
- Date
- Filed
- Economy·4 min to read
- Re
Fed sees full employment, but a broader gauge of joblessness keeps climbing
ReFed sees full employment, but a broader gauge of joblessness keeps climbing
The official unemployment rate has fallen to 4.1%, leading the Federal Reserve to focus on inflation. Yet a broader measure of the 'functionally unemployed' — including part-time workers and those earning poverty wages — rose for a fourth straight month in July, reaching 24.9%.
The Labor Department's unemployment rate has been declining in recent months, but an alternate measure suggests the labor market is weaker than the headline number implies. In July, the official rate dipped to 4.1%, down from 4.2% in June and 4.5% in November. Wall Street expects Friday's August jobs report to hold the rate steady at 4.1% while payrolls expand by 50,000, rebounding from a surprise loss of 23,000 in July.
Despite weak job gains, the official jobless rate has been falling as retiring baby boomers and the Trump administration's immigration crackdown shrink the overall labor market. The breakeven rate of employment growth — the number of net new jobs needed each month to keep unemployment steady — actually went slightly negative during the summer and fall of 2025. Economists expect that to happen again in 2028, meaning the economy would have to shed workers just to keep the unemployment rate flat.
Jobless claims have also remained low, continuing a low-hire, low-fire labor market as businesses stay cautious amid tariffs and the war on Iran. The official unemployment rate 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 rather than supporting the labor market.
The Ludwig Institute for Shared Economic Prosperity (LISEP) takes a less rosy view. Its True Rate of Unemployment measures the "functionally unemployed," a category that includes 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 is functionally unemployed now stands at 24.9%, up 1.3 percentage points since March.
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.
Demographic breakdowns show uneven trends. The functional unemployment rate for Black workers was flat at 27.3% in July, while it increased 0.6 percentage points to 23.8% for white workers and 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% — the highest level since March 2021, when the economy was still recovering from the COVID shock.
Some of the demographic differences could reflect crosscurrents in the economy. The AI boom has sparked massive demand for construction and 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."
