Nearly 25% of workers are "functionally unemployed," analysis finds
An alternative measure of unemployment that accounts for wages suggests the U.S. labor market is weaker than it looks.
The U.S. job market may not be as strong as the headline unemployment rate suggests, according to a new analysis. In July, the official unemployment rate dropped to 4.1%, which is considered healthy by economists. However, this figure, known as the U-3 rate, does not provide a complete picture of the job market's health. Gene Ludwig, chairman of the Ludwig Institute for Shared Economic Prosperity (LISEP), has developed an alternative measure called the True Measure of Unemployment (TRU).
This metric includes not only unemployed individuals actively seeking work but also those who are involuntarily working part-time and earning poverty-level wages, or less than $26,000 annually before taxes. As of July, functional unemployment in the U.S. had reached 24.9%, an increase from 25.2% in December. Despite this rise, workforce participation has been decreasing.
Ludwig expressed concern that if this trend continues, it could signal weakening strength in the labor market, even if the headline unemployment rate appears favorable. Other economists have cautioned against placing too much importance on alternative measures like TRU. They point out that a 20% unemployment rate is not typical of the U.S. economy.
In July, employers unexpectedly eliminated 23,000 jobs, which was lower than economists' predictions, indicating a possible slowdown in the job market. Even though the unemployment rate is low by historical standards, many Americans still face challenges due to high inflation. In July, the Consumer Price Index increased by 3.4% annually, while wages grew by 3.2% annually.
Gregory Daco, chief economist at EY-Parthenon, attributes the slowdown in job growth to several factors. These include moderate wage growth, which reflects employers' efforts to control costs and ensure they have the right talent at the right price. Additionally, muted wage growth can dampen consumer spending, which accounts for two-thirds of U.S. economic activity.
Daco suggests that income growth has been stagnant, adjusted for inflation, leading to reduced consumer spending and potentially slowing the overall economic pace.
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