The percentage of the American workforce classified as "functionally unemployed" increased for the fourth consecutive month even as the workforce participation rate continued to decline, signaling potential weakness in the labor market, according to the Ludwig Institute for Shared Economic Prosperity (LISEP).

LISEP's July True Rate of Unemployment (TRU)—a measure of the "functionally unemployed," defined as the jobless, involuntarily part-time, and those earning a poverty wage—increased 0.2 percentage points, from 24.7% to 24.9%. Since March, the TRU increased 1.3 percentage points but remains below its December peak of 25.2%. By comparison, the U.S. Bureau of Labor Statistics reported a 0.1 percentage point improvement in the July headline unemployment rate, which fell to 4.1%.

Yet even as the functional unemployment rate rises, the labor force participation rate continues to decline. LISEP's TRU Out of the Population (TRU OOP)—a measure of the percentage of the working-age population who are not functionally employed, including those who have dropped out of the labor force—increased 0.2 percentage points, from 53.6% to 53.8%, and is up 0.8 percentage points since the start of the year.

"We shouldn't read too much into a single month, but four months begin to tell a story," said LISEP Chairman Gene Ludwig. "Functional unemployment is moving higher while workforce participation is moving lower. If this continues, it would suggest the labor market is losing strength despite what we may see in the headline unemployment numbers."

By demographic, the July TRU for Black workers remained unchanged at 27.3%, while the rate for Hispanic workers fell for the second consecutive month, down 1.5 percentage points to 26.7%. Functional unemployment for White workers increased 0.6 percentage points, from 23.2% to 23.8%.

The TRU for men decreased for the second consecutive month, down 0.9 percentage points, to 19.5%, while the rate for women increased, up 1.6 percentage points to 31%—the highest level since March 2021. As a result, the TRU gender gap widened from 9 to 11.5 percentage points, with the three-month moving average increasing from 8.9 to 9.5 percentage points.

"In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer," Ludwig said. "We need to pay attention when that starts moving in the other direction. It could be a sign that people aren't finding the opportunities they want or need, which matters for the broader economy."