When hiring managers hear that unemployment is low, it’s easy to assume the labor market is strong and hiring should be easy. But the reality is much more nuanced and complex, prompting the need to rethink unemployment and the true labor market.  

Understanding the complexity can give you a competitive edge in talent recruitment and hiring.

This article dives deeper into the U.S. labor market and why the bigger unemployment picture is increasingly important to today’s corporate hiring managers and decision makers. 

The four types of unemployment in the U.S. labor market 

Economists traditionally dissect unemployment into four main categories:  

1. Frictional: This type of unemployment represents people who are voluntarily between jobs, as well as new entrants to the workforce, such as recent graduates. Transitions from unemployment in this category are typically short-lived and therefore the least problematic in overall labor market conditions. 

2. Structural: Often triggered by technological changes and advancements, this type of unemployment reflects workers displaced from jobs when their skills no longer match the job or market needs, or when their jobs are eliminated.  

3. Cyclical: This category represents variations in the number of unemployed workers who lose jobs due to economic downturns, recessions, or other crisis-inducing events that alter economic conditions, such as a pandemic, drops in consumer demand, and other major impacts on business cycles. Layoffs, furloughs, and labor market slack create downward trends in jobs growth and total employment.  

4. Institutional: This type of unemployment is caused by long-term or permanent changes in company, industry, or regulatory factors, such as significant increases in the minimum wage, competitor wage growth, expanding unionization rates, discriminatory hiring practices, and other hiring and labor market trends that impact monetary policies, payrolls, or job openings. 

There is also seasonal unemployment in several industries where many workers are only needed during peak business periods of the year. Regional unemployment hits areas struck by economic crises, natural disasters, tourism declines, or other events. And voluntary unemployment represents people who choose not to work due to insufficient pay or who prefer unemployment benefits or severance packages. 

While all of these categories help explain why people are unemployed, they don’t reveal the full story of how Americans are actually faring in the U.S. economy. And this knowledge gap can prevent employers from finding the leaders and workforce talent they need to prosper and grow. 

Introducing the “True Rate of Unemployment” 

The Ludwig Institute for Shared Economic Prosperity (LISEP) developed the True Rate of Unemployment (TRU) to provide a broader view of workforce health.  

Unlike traditional government unemployment statistics, TRU includes individuals who are considered “functionally unemployed,” meaning they:  

• Don’t have a full-time job  

• Want full-time work but can’t find it  

• Are working but earning wages below the poverty level  

According to research highlighted by LISEP, nearly 25% of Americans fall into this functionally unemployed category – a much larger portion of the workforce than headline unemployment numbers suggest.   

The TRU metric also breaks down disparities by race, gender, and education level. Rates are typically higher for:  

• Women  

• Black workers  

• Hispanic workers  

• Individuals without a high school diploma  

This data on labor force participation reveals economic challenges often masked by conventional unemployment figures. It also offers policymakers and employers a more accurate indicator of middle- and low-income economic well-being among available workers. 

Why this matters to hiring managers and decision makers  

As the above data reveals, if nearly one in four Americans in the labor force is functionally unemployed, what does that mean for your organization? More specifically, how can you use this knowledge to gain a competitive edge in talent acquisition? 

Start thinking about unemployment in new ways! 

• There is talent in the market, but it may not look traditional: Many capable and talented professionals are underemployed or stuck in roles that don’t utilize their full potential.
• Skills gaps are real, but trainable: While structural unemployment suggests a mismatch between a job and a worker, it does not necessarily indicate a lack of ability! Forward-thinking employers are investing in training and upskilling – and they’re winning in the long term.
• Compensation and career path clarity matter more than ever: In business environments where workers are earning below a living wage, offering competitive pay and opportunities for upward mobility become powerful differentiators that greatly improve talent retention rates, productivity, company culture, and brand reputation.
• Labor market awareness enriches hiring strategies: Demographic disparities among the functionally unemployed highlight both challenges and opportunities for today’s employers. Companies that understand and embrace the value of these workers are building stronger, more inclusive leadership teams and more vibrant workforces.  

Take a smarter approach to hiring your leaders and management teams  

As noted earlier, unemployment rates in the headlines don’t give you a true picture of the labor market – and they certainly don’t tell you how to be more strategic in talent sourcing and hiring decisions. An informed strategy is especially important when filling critical leadership roles. 

Putting broader labor market realities to work for your organization allows you to:  

• Thoughtfully adjust compensation benchmarks. 

• Identify and leverage overlooked talent pools.  

• Strengthen your leadership talent pipelines.  

• Plan proactively instead of reacting to oversimplified market noise.  

The labor market is far more nuanced than it appears and hiring managers and decision makers who understand those nuances are the ones building resilient leadership teams and workforces.  

Get more insights from a leading recruiting firm 

If you’re evaluating your management hiring plans, succession strategy, or leadership talent pipeline, I’d love to have a conversation and share more about how trends like functional unemployment can impact your hiring strategy. 

Reach out to me and let’s talk about your current and upcoming leadership hiring needs. My name is Renee Tabak and I am a Senior Recruiting Partner with Goodwin Recruiting, a Forbes Best Recruitment Company.