Reasonable (and unreasonable) people can disagree about the proper course of US immigration policy, but one thing isn’t up for debate: Pursuing a closed-door strategy will be inflationary, all else equal.
If the US wants to replace every Maria working in the vast services sector with a Mary, and every Jose working construction with a Joe, then Americans should expect to pay more. And nobody can blame Maria and Jose. They were more than happy to work for less (and their teenage kids were too) but they couldn’t get in. Now they’re stranded in Mexico somewhere instead of helping bring down core services inflation in America.
That’s a stylized, deliberately humorous take, but there’s a lot of truth to it. Harley Bassman makes this point all the time. “To the extent immigration [is] reduced one should expect either higher prices or lower GDP at the macro level,” he wrote in December, adding that,
The US has been cushioned against the impact of a declining birth rate (Europe) and accelerating retirements (Japan) because of our net positive immigration — legal or otherwise. And while illegal immigrants often use social services such as education and health, they do pay taxes (sales and real estate via rentals) and commit substantially fewer crimes. If you want to slam the immigration door shut, fine, you’re entitled to your own opinion (but not your own facts). Just be prepared for the consequences of higher prices and a slower economy.
Bassman is right, of course. Except for the part about Americans not being entitled to their own facts. It’s crystal clear since 2016 that at least a third of the voting public believes facts are malleable and therefore more akin to opinions than truths. As such, facts are indeed entitlements these days, and if January 6, 2021 was any indication, those entitlements are more likely to sink the republic than the kind of entitlements some GOPers spend all day worrying about.
Anyway, Goldman observed in a note published Monday that increased immigration and greater labor force participation among immigrants has played a “disproportionate” role in reducing the jobs-workers gap, which is to say immigration is largely to thank for progress towards the labor market normalization needed to control inflation in the US.
“Growth in the foreign-born labor force has accelerated to 160,000/month this year, rising 50,000/month faster than in 2022, lifted by a surging foreign-born labor force participation rate,” the bank’s Tim Krupa wrote, adding that the foreign-born labor force “now stands narrowly above trend levels.”
Note from the figure above that the foreign- and native-born LFPRs diverged fairly dramatically in 2021. While the native-born participation rate is still below the baseline, the foreign-born rate is above it.
There’s no secret as to what’s behind that dynamic. “An increase in the jobs-workers gap in industries with a higher share of foreign-born employment likely helped raise foreign-born participation through higher pay and easy availability of jobs,” Krupa went on. “The change in the LFPR was — and is likely to continue to be — driven by labor market tightness in those industries.”
Note that accommodation and food services sticks out in the figures above.
Here’s the key passage from Krupa:
We expect foreign born labor force growth to add 40,000 workers per month more than the 2010-2019 trend. This 100,000/month pace could add an incremental 500,000 workers over the next three quarters above trend levels and meaningfully dent the jobs-workers gap, which we estimate remains roughly 1.2 million above the 2 million level we think would be consistent with 3.5% wage growth and 2% inflation.
So, the fate of the Fed’s battle to put inflation back on a sustainable path to target rests, in part, with foreign-born labor.
And yet, as Goldman went on to note, “public polling suggests support for immigration has recently declined overall and across party affiliation.” That’d be the same type of public polling which consistently suggests inflation remains the biggest single-issue concern for Americans. Just another example of a voting public determined to remain uninformed about the issues they say matter most.
It may be stylized, but there is nothing humorous about it. That’s exactly how it is, and that explains at least some of the resilience in our unemployment numbers these past few years. “Economics” does not care where labor comes from, it only cares that it is good labor, and that it is fairly priced.
The USA is unique among large countries in being both (demographically) rich and (demographically) not-old. I believe the main reason is in-migration which brings younger workers who, for their first generation in America, tend to have largish families. A secondary reason is spacious geography which allows relatively largish housing.
I back-of-enveloped that the Covid period, both the health and economic effects as well as the politics exacerbated thereby, removed something like 5-8 million workers from a labor force of around 160 million. Taking away 2-5% of supply will send prices up, up, up as commodity investors know, and what is labor but the most vital commodity of all.
Another labor shortage in the US is of highly trained and educated workers. Not just tech and engineering, but also medical and teaching. TSMC’s struggles to staff its Arizona fab is just an example.
I cannot fathom why the US doesn’t open its doors wider to high education, high skill immigrants. Not even the most provincially paranoid populist can seriously claim that a foreign-born anesthesiologist is likely to be a menace to or burden on society, and the merits of having surgery with anesthesia, rather than without, should be uncontroversial.
Yet, as we’ve established, of stupidity there is sadly no shortage.
For multiple reasons Americans are more engaged today in reinforcing the wedges that divide us than implementing straight forward solutions to some of our problems. Immigration is such low hanging fruit to help with a plethora of ailments, particularly inflation and a tight labor market, it would also be relatively easily to increase legal immigration and attract both skilled and unskilled workers, alas, we rather make foreigners a boogie man to argue endlessly on Twitter about the demise of American values. We fail to realize people still want to come to the US, one day they may not, even if we really need them to.