Federal Reserve focuses on inflation while ignoring hidden risks in employment? LISEP warns: Functional unemployment rises for four consecutive months, labor market is bleeding

Zhitong Finance APP has noted that while the U.S. Department of Labor's unemployment rate has been steadily declining over the past few months—reversing last year’s upward trend—a different alternative indicator tells another story.

In July, the official unemployment rate dropped to 4.1% from 4.2% in June and 4.5% in November. This Friday, the August jobs report will be released. Wall Street expects the unemployment rate to remain at 4.1%, with 50,000 new jobs added—a rebound from the unexpected decrease of 23,000 jobs in July.

Despite recent sluggish job growth, the Department of Labor’s unemployment rate indicator has continued to fall due to the shrinking overall labor market caused by baby boomer retirements and President Trump’s crackdown on immigration.

In fact, the breakeven point for employment growth—the net number of jobs that need to be added each month to keep the unemployment rate stable—briefly turned negative during the summer and autumn of 2025. Economists expect this to occur again in 2028, meaning the economy would need to lay off workers to maintain a stable unemployment rate.

Meanwhile, initial unemployment claims have remained low, continuing the trend of low hiring and low layoffs in the labor market, as companies remain cautious amid Trump’s tariffs and the Iraq War.

The official unemployment rate is so low that Federal Reserve policymakers view it as a signal the economy has reached or is close to full employment. Federal Reserve Chair Kevin Warsh echoed this sentiment in his speech last Friday at Jackson Hole, Wyoming.

As a result, the Federal Reserve is now focusing on fighting inflation, rather than the other half of its dual mandate: supporting the labor market.

However, the Ludwig Institute for Shared Economic Prosperity (LISEP) has a less optimistic view of the workforce. The institute publishes a “true unemployment rate” indicator that measures “functional unemployment,” including the unemployed, involuntary part-time workers, and those earning below a poverty-line wage.

This indicator rose for the fourth consecutive month in July, a sharp contrast to the steady drop in the official unemployment rate this year. The current share of functionally unemployed in the labor market stands at 24.9%, up 1.3 percentage points since March.

Similarly, the proportion of working-age people not functionally employed—counting those who have exited the workforce—measured by LISEP, reached 53.8%, an increase of 0.8 percentage points since the start of the year.

In a statement in late August, LISEP president Gene Ludwig said, “The functional unemployment rate is rising while the labor force participation rate is falling. If this trend continues, it could mean the labor market is losing momentum, regardless of what the headline unemployment numbers show.”

Last month, the functional unemployment rate among Black workers held steady at 27.3%; for white workers, it rose 0.6 percentage points to 23.8%; and for Hispanic workers, it fell 1.5 percentage points to 26.7%.

Among men, the rate fell 0.9 percentage points to 19.5%. Among women, however, the rate surged 1.6 percentage points to 31%, the highest since March 2021 (when the economy was still recovering from the impact of the COVID-19 pandemic).

Some of the demographic differences may reflect several intersecting forces in the economy. The artificial intelligence boom has driven enormous demand for construction and technical workers—fields traditionally dominated by men. Meanwhile, a crisis in home care services has forced many women out of the workforce.

Ludwig stated, “In a strong labor market, good jobs and rising wages should attract more people into the workforce, not fewer. When things start moving in the other direction, we need to be vigilant. This could signal that people can’t find the opportunities they want or need—which is important for the entire economy.”