4 minEconomy
Official unemployment falls to 4.1%, but broader measure of joblessness keeps rising
The Labor Department's unemployment rate has declined to 4.1%, leading the Federal Reserve to consider the economy at full employment. However, an alternative gauge measuring the functionally unemployed has climbed for four consecutive months, reaching 24.9% in July.
The official unemployment rate has fallen to 4.1%, a level that Federal Reserve policymakers interpret as a sign the economy is at or near full employment. Yet a separate measure that counts a broader definition of joblessness has risen for four consecutive months, suggesting the labor market may be weaker than headline numbers indicate.
The Labor Department reported that the unemployment rate dipped from 4.2% in June to 4.1% in July, continuing a decline that reversed an uptick seen last year. The rate stood at 4.5% in November. Wall Street expects Friday's August jobs report to show the rate holding steady at 4.1%, with payrolls expanding by 50,000 after a surprise loss of 23,000 jobs in July.
The falling official rate comes despite weak job gains, largely because retiring baby boomers and stricter immigration enforcement have shrunk the overall labor market. The breakeven rate of employment growth, or the number of net new jobs needed each month to keep unemployment steady, went slightly negative during the summer and fall of 2025. Economists expect that to happen again in 2028, meaning the economy would need to shed workers to maintain a stable unemployment rate.
Jobless claims have also remained low, reflecting a low-hire, low-fire labor market as businesses stay cautious amid tariffs and the war with Iran. Fed Chairman Kevin Warsh said during his speech in Jackson Hole, Wyoming, on Friday that the low official rate signals full employment. As a result, the Fed's attention is now focused on fighting inflation rather than supporting the labor market.
The Ludwig Institute for Shared Economic Prosperity, however, offers a less optimistic view. Its True Rate of Unemployment measures the functionally unemployed, which includes the jobless, those involuntarily working part-time, and those earning a poverty wage. That gauge rose for the fourth consecutive month in July, reaching 24.9%, up 1.3 percentage points since March. The institute'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 for Black workers was flat at 27.3% last month, 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 demographic differences reflect crosscurrents in the economy. The AI boom has driven massive demand for construction and skilled trades, traditionally male-dominated fields. At the same time, a crisis in family-care services has forced many women to pull back from their careers.
LISEP Chairman Gene Ludwig warned that the diverging trends deserve attention. Functional unemployment is moving higher while workforce participation is moving lower, he said, which could indicate the labor market is losing strength despite what headline unemployment numbers show. In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer, he added, noting that the opposite trend could be a sign that people are not finding the opportunities they want or need.
