US unemployment rose to its highest level in nearly three years in July, and joblessness is now beginning to sharply impact Americans with less formal education and lower wages.

The overall unemployment rate jumped to 4.3% in July, up from 4.1% in June. It marked the fourth straight monthly increase and a high from the most recent low of 3.4% in April 2023.

The domestic labor market is starting to weaken due in part to the Federal Reserve's efforts to fight inflation with the highest interest rates in about 20 years. Rising unemployment and falling wage growth are boosting the odds of a looming recession.

Disparities in the jobs data show that the effects of a slowing US economy are not equal.

The unemployment rate for those 25 years and older without a high school diploma was 6.7% in July, up from 5.3% a year ago and the highest level of joblessness for that group since October 2021. The unemployment rate for Americans with college degrees was 2.3% in July, down slightly from June and only modestly higher than a year earlier when it was 2%.

The higher rate of joblessness among those without a high school diploma is at least partly due to the falling number of potential workers without a high school diploma. There are a little more than 8 million people in the labor force without high school diplomas, compared to 11 million a decade ago, said Thomas Simons, a senior economist at Jefferies. The labor force participation rate among this group has also risen, from about 44% to 49% over this time, indicating that there are fewer people in the workforce who did not graduate high school.

"There is less competition in the labor market among workers without a high school diploma because there are fewer of them," Simons said. "However, I would bet that businesses are less willing to [hire] people without a high school diploma since there are greater numbers of people with a diploma or a college degree."

Stalling demand

The rise in unemployment is likely caused by an increase in labor supply that the US jobs market cannot absorb, rather than outright job losses, said James Knightley, chief international economist with ING. The US civilian labor force, Americans either employed or looking for work, grew to a record 168.4 million in July, at a time when hiring slowed to the lowest levels in a decade.

"Unskilled new labor market joiners are struggling to find work in an environment where new demand is stalling," said Knightley.

Unemployment is likely rising rapidly for less-educated workers as workers with more education tend to be in occupations and industries that are "less susceptible" to the business cycle, said Augustine Faucher, chief economist of The PNC Financial Services Group. Workers with less formal education and lower wages tend to have higher rates of joblessness, Faucher said, but this was not the case when the pandemic threw the jobs market historically out of balance.

"When the job market was very tight a year or two ago, businesses were more willing to hire workers with less education," Faucher said. "Now that the labor market is softening, they can be pickier, so they are passing on workers with less education and are hiring more educated workers."

A 2023 report published by Georgetown University indicates that the US could have 171 million jobs in 2031, a net increase of 16 million from 2021, with 72% of these new openings requiring postsecondary education or training.

The emphasis on postsecondary education will be driven by the education credentials required by the fastest-growing industries compared to industries with slower growth, according to the report. Overall, occupations across industries are also requiring workers to be responsible for more complex tasks, therefore leading employers to seek candidates with higher education credentials, it added.

Vicious cycle

A rise in unemployment for any group will have a negative effect on consumer spending and overall economic growth, but the impact may be less from a rise in joblessness among less-educated, lower-paid workers since they typically spend less than middle- and upper-income households with stronger balance sheets, said Nancy Vanden Houten, lead US economist at Oxford Economics.

"Still, there is a risk that any cutback in spending due to job losses triggers more job losses, setting a vicious cycle in motion," Vanden Houten said.

Job market slowdowns tend to trigger a "self-perpetuating cycle" where workers who lose their jobs and are unable to find another spend less, which softens demand and leads to more businesses cutting their workforce, said Luke Pardue, policy director at the Aspen Economic Strategy Group.

"Rising unemployment among less-educated workers can kick off the downward spiral that leads to a recession because these workers often have less savings to cushion a prolonged period of time looking for work," Pardue said. "Their time spent without a job then translates much more directly into reduced spending compared to when a worker with higher education, and, on average, greater savings, is out of work."

The employment situation also varies significantly between industries. The information sector had an unemployment rate of 5.6% in July, the highest of any industry tracked by the US Bureau of Labor Statistics, and up from 2.4% a year ago.

Some of this is cyclical, as internet and tech companies were hit by higher interest rates, and some of it is structural, as traditional print media and broadcast journalism have seen sharp declines in employment, said Faucher with PNC.

Unemployment in cyclical industries like manufacturing, wholesale trade and transportation and warehousing will likely continue to rise, and job growth in financial activities will likely slow as the Fed may be slow in cutting rates, Faucher said.

Industries tied to leisure spending, such as travel, restaurants and hotels, would normally see a rise in unemployment as the economy slows, but that may not be the case now.

"High-income households are still doing well … and there's still a lot of pent-up demand for leisure spending after the pandemic that will provide a cushion," Faucher said.

But the labor market is expected to continue weakening as the Fed is likely to keep its benchmark interest rate near 5.5% until at least September, hindering future borrowing plans.

"I think that the impact of higher-for-longer [interest rates] on employment is only just now being felt," said Simons with Jefferies. "Businesses with fringy financing and slowing growth could hold on to workers for a time, hoping for a turnaround, but they cannot hold on forever."