The Federal Reserve is closely monitoring inflation while ignoring employment landmines? LISEP warns: functional unemployment has risen for four consecutive months, and the labor market is losing ground.

Notably, the unemployment rate reported by the U.S. Department of Labor has been declining for several months, reversing last year's upward trend, but another alternative indicator tells a different story. In July, the official unemployment rate fell from 4.2% in June and 4.5% in November to 4.1%. The August employment report is set to be released this Friday, with Wall Street expecting the unemployment rate to hold steady at 4.1%, while an expected addition of 50,000 jobs will rebound from an unexpected loss of 23,000 jobs in July. Despite the recent softening in job growth, the unemployment rate from the Department of Labor has been declining due to the retirement of the baby boomer generation and the overall contraction of the labor market due to President Trump's immigration crackdown. In fact, the breakeven point for job growthmeaning the net new jobs required each month to keep the unemployment rate stablehas slightly turned negative during the summer and fall of 2025. Economists predict this scenario will reappear in 2028, indicating that the economy will need layoffs to maintain a stable unemployment rate. At the same time, initial jobless claims remain low, continuing a labor market pattern of low hiring and low layoffs, as companies exercise caution in the context of Trump's tariffs and the war in Iraq. The official unemployment rate is so low that Federal Reserve policymakers view it as a sign the economy has reached or is nearing full employment. Federal Reserve Chair Kevin Warsh expressed a similar viewpoint in a speech last Friday in Jackson Hole, Wyoming. Therefore, the Federal Reserve is now focusing on combating inflation rather than the other part of its dual mandate, which is to support the labor market. However, the Ludwig Institute for Shared Prosperitys (LISEP) perspective on the labor force is less optimistic. The institute has published a "true unemployment rate" indicator that measures the "functionally unemployed" population, including jobless individuals, those involuntarily working part-time, and those earning below the poverty line. This indicator rose for the fourth consecutive month in July, starkly contrasting with the official unemployment rate, which has been steadily declining this year. Currently, the proportion of functionally unemployed individuals in the labor market stands at 24.9%, an increase of 1.3 percentage points since March. Similarly, the proportion of the working-age population classified as functionally unemployed including those who have exited the labor markethas reached 53.8%, up 0.8 percentage points since the beginning of the year. LISEP President Gene Ludwig stated in a late August announcement, "The functional unemployment rate is rising while labor force participation is falling. If this continues, it could mean that the labor market is losing momentum, regardless of what the headline unemployment data shows." Last month, the functional unemployment rate for Black workers remained at 27.3%; for White workers, it rose by 0.6 percentage points to 23.8%; while for Hispanic workers, it decreased by 1.5 percentage points to 26.7%. For men, this rate fell by 0.9 percentage points to 19.5%; however, for women, it surged by 1.6 percentage points to 31%, reaching its highest level since March 2021, when the economy was still recovering from the impact of the COVID-19 pandemic. Some demographic differences may reflect several intersecting forces in the economy. The AI boom has created significant demand for workers in construction and technical jobs, traditionally male-dominated fields. Meanwhile, a crisis in home healthcare services has forced many women out of their careers. Ludwig stated, "In a robust labor market, good jobs and rising wages should attract more people into the labor force, not fewer. When conditions begin to shift in the opposite direction, we need to be cautious. This could signal that people are not finding the opportunities they want or need, which is important for the entire economy."