Beneath the reassuring headline of low unemployment, a quieter erosion is underway in the American labor market. The Ludwig Institute's broader measure of joblessness — one that counts involuntary part-timers and those earning poverty wages — reached nearly 25% in July, a figure that invites us to ask not merely whether people are working, but whether work is working for them. With wage growth trailing inflation for the fourth consecutive month and workforce participation declining, the distance between statistical health and lived economic reality continues to widen.
Nearly 25% of U.S. Workers 'Functionally Unemployed,' Analysis Finds
Good jobs and rising wages should bring people in, not push them out
Mark
Why does the official unemployment number miss so much?
Mimi
Because it only counts people without jobs who are actively looking. It ignores someone working 10 hours a week because they can't find full-time work, or someone earning $20,000 a year. The official measure is clean and simple, but it leaves out the struggle.
Mark
And this functional unemployment measure—24.9%—is that credible?
Mimi
Some economists think it's too broad. But the pieces it's measuring are real: part-time workers who want more hours, people in poverty wages. Whether you call it 24.9% or something else, those people exist and they're struggling.
Mark
What worries Ludwig most?
Mimi
The direction. Four months of rising functional unemployment while fewer people enter the workforce. That's not a sign of strength. It suggests people are giving up, not that the market is booming.
Mark
How does wage stagnation connect to all this?
Mimi
If your wages aren't keeping up with inflation, you have less to spend. And consumer spending drives the economy. So weak wage growth doesn't just hurt individuals—it slows everything down.
Mark
Is this a recession?
Mimi
Not yet. But it's a warning. The economy can look stable on paper while workers experience real pressure. That pressure, if it spreads, becomes a problem for everyone.
Mark
What would change the trajectory?
Mimi
Employers would need to raise wages faster than inflation, or workforce participation would need to stabilize. Right now, neither is happening.
O Pulso
- Nearly one in four American workers qualifies as 'functionally unemployed' under a measure that counts poverty wages and unwanted part-time work — a figure that has risen for four straight months.
- Wages grew at 3.2% annually while inflation ran at 3.4%, quietly draining purchasing power from households that have no margin to absorb the difference.
- Workforce participation is falling rather than rising, a signal that workers are not being drawn in by opportunity but pushed out by its absence.
- Employers are holding the line on labor costs with precision, producing a job market that looks stable in the aggregate but feels precarious at the kitchen table.
- Economists debate whether the functional unemployment measure overstates distress, but the underlying data — involuntary part-time work, poverty wages, shrinking participation — are not in dispute.
Beneath the reassuring headline of low unemployment, a quieter erosion is underway in the American labor market. The Ludwig Institute's broader measure of joblessness — one that counts involuntary part-timers and those earning poverty wages — reached nearly 25% in July, a figure that invites us to ask not merely whether people are working, but whether work is working for them. With wage growth trailing inflation for the fourth consecutive month and workforce participation declining, the distance between statistical health and lived economic reality continues to widen.
The official unemployment rate in July registered at a level economists typically call healthy, but a broader measure tells a more unsettling story. The Ludwig Institute for Shared Economic Prosperity tracks what it calls "functional unemployment" — a figure that includes not only jobseekers but also involuntary part-time workers and those earning under $26,000 annually. In July, that number reached 24.9%, and it has climbed for four consecutive months.
Gene Ludwig, the institute's chairman, sees the trend as a warning. In a genuinely strong labor market, rising wages and good jobs should draw more people in. Instead, workforce participation is declining — a sign, Ludwig argues, that workers are withdrawing not by choice but because the work they need simply isn't there.
The wage picture deepens the concern. Annual pay growth of 3.2% sounds reasonable until measured against inflation running at 3.4%. That gap, small as it appears, compounds quietly: one household delays a car repair, another cuts back on groceries, and multiplied across millions of families, consumer spending — the engine of two-thirds of the American economy — loses momentum. EY-Parthenon's chief economist Gregory Daco noted that real income growth has been trending near zero, forcing harder tradeoffs with each passing month.
Some economists resist the functional unemployment framing, arguing that a figure above 20% doesn't square with observable conditions. But the data beneath it — involuntary part-time work, poverty wages, falling participation — are not contested. Whether this represents a temporary soft patch or the early shape of something more serious remains the open question. Four months of rising functional unemployment is not yet a crisis, but it is a pattern that suggests the labor market may be quietly losing ground in ways the standard numbers were never designed to capture.
The official unemployment rate in July sat at a level economists typically consider healthy, yet beneath that reassuring headline lies a more complicated picture of American work. Nearly one in four workers—24.9% of the labor force—are what researchers call "functionally unemployed," a category that extends far beyond the traditional definition of joblessness. This broader measure, developed by the Ludwig Institute for Shared Economic Prosperity, captures not just people without work who are actively searching, but also those trapped in involuntary part-time positions and those earning less than $26,000 annually before taxes. The gap between what the government reports and what workers actually experience reveals a labor market that may be losing momentum in ways the standard statistics miss.
Gene Ludwig, chairman of the research institute, has been tracking this alternative metric closely. Functional unemployment has climbed for four consecutive months, though it remains slightly below where it stood in December. Ludwig frames the trend as a warning sign. When workforce participation falls while functional unemployment rises, he argues, it suggests people are withdrawing from the job market not by choice but because they cannot find the work they need. "In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer," Ludwig said. The inverse is happening: fewer people are entering the labor force, and more of those working are doing so in circumstances that leave them economically vulnerable.
The disconnect matters because it points to a deeper problem with how Americans are earning. Wages grew at an annual rate of 3.2% in July, while inflation climbed at 3.4%—meaning workers are effectively losing purchasing power month after month. This gap may seem small, but it compounds. One company's decision to hold wages flat is another household's decision to cut back on groceries or delay a car repair. Gregory Daco, chief economist at EY-Parthenon, explained the mechanism plainly: employers are managing costs carefully, trying to secure the right talent at the right price without overspending. The result is muted wage growth that dampens the consumer spending driving two-thirds of the American economy.
Daco cautioned that income growth, adjusted for inflation, has been trending near zero. That forces households into harder choices about where their money goes and how much they can spend. When millions of people tighten their belts simultaneously, the overall pace of economic activity slows. The labor market may look stable on the surface—job creation continues, unemployment remains low by historical standards—but the quality of that employment and the real purchasing power it provides are both deteriorating.
Other economists have pushed back against the functional unemployment measure, arguing that a 20%-plus unemployment rate simply does not align with observable economic conditions. Yet the underlying data Ludwig's institute is tracking—involuntary part-time work, poverty wages, declining workforce participation—are real. The question is whether these trends represent a temporary softness or the beginning of something more serious. Four months of rising functional unemployment is not yet a crisis, but it is a pattern worth watching. If it continues, it would suggest the American job market is weaker than the headlines indicate, and that millions of workers are finding fewer opportunities to earn their way into genuine economic security.
Citações Notáveis
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.— Gene Ludwig, Ludwig Institute for Shared Economic Prosperity
When income growth adjusted for inflation trends near zero, it limits consumer spending growth and forces households to make more difficult choices about where they spend their money.— Gregory Daco, EY-Parthenon chief economist
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Economy & Finance