Fed's Full-Employment View Clashes With Rising Functional Unemployment Measure

While the official unemployment rate fell to 4.1% in July, a broader gauge from the Ludwig Institute for Shared Economic Prosperity rose for a fourth straight month, reaching 24.9% of the labor force. This measure counts jobless workers, involuntary part-timers, and those earning poverty wages, indicating underlying labor market weakness. The divergence suggests the economy may be losing strength despite the headline numbers, even as the Fed focuses on inflation.

The divergence between the official unemployment rate and LISEP’s broader measure stems from how each counts workers. The official figure excludes those who have stopped looking and treats part-time workers as employed regardless of hours. LISEP’s gauge adds involuntary part-timers and full-time workers earning below the poverty line, capturing underemployment and wage stagnation. Recent declines in the official rate have been driven partly by demographic shifts—retiring baby boomers and stricter immigration policies shrinking the labor pool—rather than robust hiring. Meanwhile, monthly payroll gains have been weak, with July posting a net loss of 23,000 jobs, though the unemployment rate still fell.