The U.S. job market is less robust than it looks, according to a new analysis. 

The nation’s unemployment rate fell to 4.1% in July, well within the range economists consider healthy. Yet that measure, which reflects the percentage of people over the age of 16 who don’t have a job and who are looking for work, is an imprecise metric that fails to offer a full picture of the health of the job sector, according to Gene Ludwig, chairman of the Ludwig Institute for Shared Economic Prosperity (LISEP).

The economic research firm’s “True Rate of Unemployment” (TRU) seeks to capture the share of workers that the group defines as “functionally unemployed.” This includes not only people who are unemployed and looking for a job, but also those who are involuntarily working part-time and who are earning poverty-level wages, or less than $26,000 annually before taxes. 

Functional unemployment across the U.S. has climbed four straight months and stood at 24.9% as of July, although that’s down from 25.2% in December, according to the Ludwig Institute. 

“We shouldn’t read too much into a single month, but four months begin to tell a story,” Ludwig said in a statement on Thursday. “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.”

“In a strong labor market, good jobs and rising wages should bring more people into the workforce, not fewer,” Ludwig added. “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.”

Other economists cautioned against putting too much weight on alternative measures of labor market health, including TRU. 

“An unemployment rate that would be in the 20% range does not line up with anything we see in the U.S. economy,” EY-Parthenon chief economist Gregory Daco told CBS News.

Wages lag inflation

Employers around the country unexpectedly cut 23,000 jobs in July, undershooting economists’ expectations and signaling the job market may be slowing. 

Meanwhile, although unemployment is low by historical benchmarks, many Americans continue to grapple with the impact of high inflation. In July, the Consumer Price Index rose at an annual pace of 3.4%, while wages rose at an annual rate of 3.2%.

Daco said several factors are weighing on job growth. “You see ongoing moderation of wage growth, which is reflective of employers controlling costs, and wanting to make sure they have the right talent and the right skills at the right price, and not spend excessively.”

Muted wage growth dampens consumer spending, which drives two-thirds of U.S. economic activity.

“One company’s wage bill is another person’s income, and in turn their capacity to spend,” Daco said. “When I look at potential signs of softness for the U.S. economy, income growth has been trending around zero, adjusted for inflation, and that limits consumer spending growth. It forces some households to make more difficult choices in terms of where they spend their money and how much they spend, and that slows the overall pace of the economy.”