Increasing Functional Unemployment Reflects A Lingering Labor Market Weakness, Says Ludwig Institute

Rising Functional Unemployment: A Cause for Concern

The Ludwig Institute for Shared Economic Prosperity (LISEP) has recently reported a troubling trend within the American labor market: functional unemployment has climbed for four consecutive months. This phenomenon, defined by the presence of jobless individuals, those involuntarily working part-time, and individuals earning below the poverty line, has exhibited a significant shift amidst a landscape of declining workforce participation rates.

As of July, the True Rate of Unemployment (TRU) indicated that 24.9% of the workforce qualifies as functionally unemployed, marking an increase of 0.2 percentage points from the previous month. This statistic is particularly concerning, as it highlights a gradual but persistent rise from a starting point of 23.6% earlier this year. Notably, this figure still sits below its December 2025 peak of 25.2%.

In contrast, the official headline unemployment rate, as stated by the U.S. Bureau of Labor Statistics, showed a slight improvement. It decreased by 0.1 percentage point to 4.1% in July. This disparity raises questions about the health of the job market. While the headline unemployment figure appears stable, the rise in functional unemployment suggests that many Americans are struggling to find meaningful employment opportunities.

Another relevant measurement from LISEP, known as the TRU Out of the Population (TRU OOP), measures the working-age population that is not functionally employed. This also saw an increase to 53.8%, an upward trend of 0.8 percentage points since the beginning of the year, further indicating that fewer individuals are engaged in the labor market.

Gene Ludwig, the chairman of LISEP, emphasized the importance of these trends. He noted that while a single month might not provide overwhelming insight, four months certainly indicate a narrative worth considering. “Functional unemployment is moving higher while workforce participation is moving lower. If this pattern persists, it will suggest a waning strength in the labor market, even if headline figures seem to suggest otherwise,” he stated.

When examining the TRU through demographic lenses, significant differences emerge. For instance, the functional unemployment rate among Black workers remains stagnant at 27.3%, while Hispanic workers have seen a reduction of 1.5 percentage points to 26.7%. Additionally, the functional unemployment rate for White workers increased to 23.8%, indicating a contrasting trend between these groups.

Gender-based analysis of the TRU reveals that the rate for men has decreased for the second consecutive month, now standing at 19.5%. Conversely, the rate for women has escalated to 31%, the highest point since March 2021. The widening gender gap in functional unemployment, now stretched to 11.5 percentage points, reflects an alarming trend in which women are increasingly finding it more difficult to secure adequate job opportunities.

Ludwig emphasized that in a robust labor market, the expectation is that good jobs and rising wages would entice more people into the workforce. “When we see the opposite, it raises alarms. It could indicate insufficient opportunities, which is critical for the overall economy,” he warned.

LISEP's recent white paper, “Measuring Better Development of ‘True Rate of Unemployment’ Data as the Basis for Social and Economic Policy,” outlines their innovative approach to measuring functional unemployment, aiming to enhance understanding of economic realities faced by Americans, particularly those in low- and middle-income brackets.

The organization’s efforts to provide transparent and reliable economic indicators are vital, especially as policymakers grapple with data that may not fully encapsulate the workforce’s complexities. It is crucial to continue monitoring these trends closely, as they bear significant implications for economic growth, social stability, and individuals' livelihoods. As the job market continues to evolve, the voices and needs of America’s functional workforce must remain at the forefront of economic conversations.

In summary, the rise in functional unemployment for four consecutive months presents a complicated picture of the American labor market. While overall unemployment figures may depict a stable environment, the underlying trends point toward a potential decline in job quality and availability—factors that policymakers should prioritize in their strategies moving forward.