The Jobless Rate’s Dirty Secret: What’s Behind the Full Employment Illusion?

The Federal Reserve recently declared that the economy has reached full employment, but this conclusion is based on a narrow definition of joblessness that doesn’t capture the struggles of millions of Americans. Beneath the surface of a record-low official unemployment rate lies a more nuanced reality revealed by an alternate measure.

This alternative metric, known as the “True Rate of Unemployment” from the Ludwig Institute for Shared Economic Prosperity, goes beyond the Labor Department’s metric to include those who are functionally unemployed – jobless, working part-time involuntarily, or earning a poverty wage. This number has been on the rise, increasing by 1.3 percentage points since March to a staggering 24.9% of the labor market.

The share of the working-age population not functionally employed has also ticked up, hitting 53.8%, up from the start of the year. This trend suggests that many Americans are dropping out of the workforce altogether. The demographics reveal an even more disturbing picture: Black workers continue to bear the brunt of functional unemployment, with a rate of 27.3% in July. Women saw their rate jump by 1.6 percentage points to 31%, the highest level since March 2021.

The AI boom has created new opportunities in skilled trades and construction but has also driven up demand for workers in these fields. Meanwhile, a crisis in family-care services has forced many women to reevaluate their careers, leading to a decline in workforce participation. These crosscurrents are complex and multifaceted, but they underscore the need for targeted policies that address the specific challenges facing these communities.

The contrast between the official unemployment rate and this more nuanced measure highlights the limitations of relying solely on headline numbers. Policymakers need to pay attention to these trends, which suggest that people aren’t finding the opportunities they want or need. This is a sign that the labor market is losing strength, and one that warrants closer scrutiny.

The Federal Reserve’s focus on fighting inflation may be justified, but it shouldn’t come at the expense of neglecting the labor market. The dual mandate of supporting employment growth and price stability requires policymakers to stay vigilant, particularly when faced with contradictory indicators like these. By acknowledging the limitations of their current metrics and seeking out more comprehensive measures, they can develop a more nuanced understanding of the economy’s health.

As Gene Ludwig noted, “In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer.” The challenge now is to create policies that address the underlying issues driving functional unemployment, rather than just treating its symptoms. It’s time for policymakers to get real about the state of the labor market – and to act accordingly.

The coming months will be crucial in determining whether these trends continue or reverse course. Policymakers must stay attuned to the warning signs hidden beneath the surface of a seemingly strong job market, as the future of American workers depends on it.