At first glance, the U.S. labor market looks solid. Unemployment remains low at 4.2%, wages are growing steadily, and the Bureau of Labor Statistics reported 139,000 new jobs added in May. However, a new report reveals a troubling undercurrent: a rising number of Americans are “functionally unemployed,” painting a less rosy picture of economic health.
The term “functional unemployment” refers to people left out of headline unemployment figures but still facing labor market challenges. This group includes those who’ve given up looking for work and those employed but earning less than $25,000 annually. According to a recent report from The Ludwig Institute for Shared Economic Prosperity (LISEP), a nonprofit focused on economic research, about 24.3% of Americans now fall into this category—up from 22.3% two years ago.
“Nearly one in four workers is functionally unemployed, and the trend shows no signs of slowing,” said LISEP Chair Gene Ludwig in a statement. “Too many Americans are struggling to get by, and without a surge of reliable, well-paying jobs, this economic divide will only grow.”
The concept of functional unemployment sheds light on why many workers feel pessimistic about the economy despite low traditional unemployment rates. A recent Glassdoor report, for instance, noted that confidence among entry-level workers has plummeted to an all-time low. While the labor market isn’t as hot as it was a few years ago, concerns about emerging factors like tariffs and AI’s impact on jobs are adding to workers’ unease.
“The rise in functional unemployment is a red flag, especially in an already uncertain economy,” Ludwig added. As alternative metrics like these gain attention, they highlight the need for policies that address not just job creation, but the quality and accessibility of those jobs for all Americans.