Something strange is happening in the US labour market. The latest data released by the Bureau of Labor Statistics shows that the US economy lost 23,000 jobs in July, yet its unemployment rate actually fell to 4.1%. A closer look helps explain the apparent contradiction.
To be counted as unemployed in the US, a person must be actively looking for a job. Today, however, the job market is so bleak that people are giving up the search for work. Economists call this the ‘discouraged worker effect.’ As a result, the unemployment rate can decline even as demand for labour falls, because the supply of labour is shrinking even faster. Some estimates suggest that more than 2 million people have left the US labour force since November 2025.
By advanced-economy standards, the US has a high poverty rate. In 2024, 10.6% of Americans lived below the poverty line, which is defined as an annual income of less than $31,812 for a family of four. As some observers have noted, this figure may not reflect the true extent of the problem, since poverty has many dimensions that are not captured by a single income-based measure.
Moreover, many workers above the poverty line are seeing their real incomes shrink. Average US wages grew by 3.2% over the past year, while inflation hovered around 3.5%. With jobs becoming harder to find and workers losing purchasing power, there would seem to be good reason to worry that the economy is headed for a recession. But that is not happening—at least in the conventional sense.
The term ‘recession’ typically refers to a decline in economic activity across the country as a whole. A commonly used measure is two consecutive quarters of falling real GDP. By this measure, the US is not currently in recession, largely because rapid growth in some sectors, particularly AI, is offsetting weakness elsewhere.
The result is a striking divide. Even as American workers lose out, those whose incomes depend on stocks and corporate profits are enjoying boom times. Notably, reports of job losses and worsening labour-market conditions coincided with a rise in US stock markets. The S&P 500, for example, gained 47.68 points, or 0.6%, that same week.
These trends are not unrelated. As firms respond to new technologies by shedding workers, labour costs can fall, boosting profits. Technology stocks did particularly well as news of US job losses broke, with Nvidia gaining 2.3% and Broadcom up 1.7%.
This economic divide is not confined to the US. India is experiencing similar bifurcation. Youth unemployment remains extremely high, with a severe shortage of jobs for young graduates of colleges and universities. The World Bank estimates that India’s youth unemployment rate increased by 2.1 percentage points to 17.7% in 2025. Consequently, many of these young people and their households may be experiencing a decline in real income.
At the same time, India’s economy continues to grow rapidly, with per capita GDP rising by 6.6% in 2025. Here, too, aggregate figures conceal a bleaker picture, as strong income growth in a small segment of the population coexists with economic distress for many others.
Allowing such a stark divide represents a major policy failure. As a middle-income country with relatively low wages, India can, given the right policies, create jobs for its young people. This remains true even if current labour-market trends are being driven by AI and other digital technologies that reduce demand for human labour and concentrate profits in a few hands.
As economies become increasingly fragmented, policymakers, journalists and other observers must pay closer attention to what lies beneath aggregate statistics. We are entering an era of what might be called ‘gated recessions’: certain groups or regions experience recession-like conditions while the rich grow richer, keeping aggregate indicators looking healthy.
It is possible, for example, that lower-middle-class households in India—especially those with young adults fresh out of college—are effectively caught in a gated recession. In the US, states with the highest concentrations of low-income residents, such as Mississippi, New Mexico, Louisiana and Oklahoma, could similarly be experiencing localized, gated recessions as the labour market deteriorates.
The point is not to assign blame, as the causes of these disparities are often deep-seated and cannot be attributed to any single individual, party or administration. Nevertheless, politicians need to be held accountable for their response, rather than be allowed to dismiss the problem by pointing to favourable aggregates.
Addressing these divisions will require multi-faceted policy interventions. As AI continues to advance, wealth inequality is likely to skyrocket. Attempting to protect jobs by discouraging AI adoption through regulation would do more harm than good, creating costly distortions and weighing on productivity growth.
A more effective way to break down the barriers between gated wealth and gated poverty, and ensure that the gains generated by technological progress are broadly shared, would be to impose higher marginal taxes on the fortunes, inheritances and incomes of the super-rich. ©2026/Project Syndicate
The author is a professor of economics at Cornell University and a former chief economic advisor to the Government of India.