A fresh economic analysis has found that nearly 25% of U.S. workers are “functionally unemployed,” a figure significantly higher than the official unemployment rate. The analysis highlights hidden weaknesses in the labor market, including workers stuck in poverty-level wages or involuntary part-time jobs.
What Happened
The Ludwig Institute for Shared Economic Prosperity (LISEP) released its “True Rate of Unemployment” (TRU) analysis, showing that as of July, 24.9% of U.S. workers meet the criteria of being functionally unemployed. This includes not only those actively unemployed and seeking work but also workers forced into part-time roles or earning less than $26,000 annually before taxes, considered poverty-level wages. This measure has risen for four consecutive months, though it remains slightly below the 25.2% recorded in December.
Despite the official U.S. unemployment rate standing at 4.1% as of July—considered healthy by many economists—the TRU measure suggests a less robust job market. Employers also cut 23,000 jobs unexpectedly in July, adding to concerns of labor market slowing.
Key Facts
The official unemployment rate fell to 4.1% in July 2026, according to government data. However, the TRU rate from LISEP, which factors in underemployment and low wages, reached 24.9% during the same period. The threshold for poverty-level wages among full-time workers is defined as under $26,000 annually before taxes.
Additionally, inflation remains above wage growth, with the Consumer Price Index rising 3.4% annually in July, compared to wages increasing 3.2% annually—resulting in real wages lagging behind inflation.
EY-Parthenon chief economist Gregory Daco emphasized that an unemployment rate near 20% does not align with broader economic data, underscoring the continued debate over alternative labor market metrics.
What This Means
The TRU’s elevated functional unemployment rate suggests that a significant portion of the workforce is employed in roles that may not support financial stability or career advancement. Workers stuck in part-time employment or earning near-poverty wages face diminished economic security, which reduces their consumption power and puts downward pressure on overall economic growth.
This disconnect between headline unemployment numbers and underlying labor market realities indicates that employment quality, not just quantity, matters critically for economic health. As wages fail to keep pace with inflation, many workers experience effective income stagnation, which could temper consumer spending—a major engine of U.S. economic activity.
Moreover, a declining labor force participation alongside rising functional unemployment points to potential long-term challenges: discouraged workers leaving the workforce and a labor market unable to provide desirable opportunities for a sizable fraction of Americans.
Background
The official unemployment rate reflects the share of people over age 16 without a job who are actively seeking work. However, it does not account for underemployment or those earning wages insufficient to meet basic living standards. LISEP’s TRU attempts to provide a broader and more nuanced view of labor market health by including these additional vulnerable groups.
In the context of rising inflation and moderated wage growth, these data underscore the complexity of interpreting labor market signals and the limitations of traditional metrics in capturing the full economic experience of workers.
Analysis
Gene Ludwig, chairman of LISEP, cautioned that the rising functional unemployment rate alongside declining workforce participation could signal weakening labor market strength despite the favorable headline unemployment rate. He stressed that an effective recovery should bring more people into the workforce with better job opportunities and wages.
Gregory Daco from EY-Parthenon suggested that employers are managing wage growth carefully amid cost control efforts, contributing to job growth moderation and a challenging environment for income expansion.
What Remains Unclear
The implications of the TRU rate are debated, and it remains unclear how much weight policymakers and economists will assign these alternative measures versus the official statistics. The impact of these trends on future Federal Reserve policy and broader economic recovery trajectories is also uncertain.
Sources
This article is based on reporting and publicly available information from the following source:
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