Why Immigration Has Boosted Job Gains and the Economy

The strength of the American economy continues to amaze. Even after the Federal Reserve raised interest rates at an unprecedented pace to bring down runaway inflation, consumers continued to spend, the labor market remained strong, and the long-awaited recession did not materialize.

Economists now attribute some of this strength to increased migration in the wake of the Covid-19 pandemic, which they say has helped insulate the economy from the effects of inflation by dampening wage gains and supporting consumer spending. Economists say that under typical conditions, the effects of immigration on production and consumption tend to balance each other out, meaning there is no significant net impact on the economy. But due to a significant shortage in the supply of workers in 2022, the increase in immigration has helped rebalance the labor market and control wage pressures (and thus inflation).

An analysis by Goldman Sachs found that the immigration rebound helped reduce wage growth by about three-tenths of a percentage point overall, and at least twice that in the leisure and hospitality sectors. At the same time, researchers from the Brookings Institution estimate that immigration has increased consumer spending — an important driver of economic growth — by about 0.1 percentage point in 2022 and 0.2 percentage point in 2023. They expect another 0.2 percentage point increase this year.

Rising migration

The Congressional Budget Office estimates net migration in 2023 at 3.3 million, more than triple what was expected in 2019. Foreign-born workers made up more than 19% of the workforce — an all-time high — in February, according to the office. . Labor statistics.

Even Federal Reserve Chairman Jerome Powell acknowledged the impact. “We’ve got what amounts to a significant increase in the potential output of the economy that is not related to productivity,” he said after the central bank’s policy meeting earlier this month. “It was about having more workers…in 2022, whether through sharing or migration.”

Migration is not slowing down, but with inflation improving and the labor market better balanced, market watchers should not count on this trend to have the same significant impact on the economy in the coming months. Here’s everything investors need to know.

How does immigration affect the economy?

New immigrants put pressure on consumption and production. More immigrants mean more people buying goods and services, which is generally viewed as inflationary. But more immigrants also mean more workers, which helps increase production and is generally seen as a deflationary factor. Traditionally, many economists believe that these two forces cancel each other out, according to David Merkel, chief U.S. economist at Goldman Sachs. But the past few years have been different.

Immigration helped ease wage pressures

“In 2022, we may have the tightest peacetime labor market in history,” Merkel says. He wrote in a recent research note that the rise in immigrants that year was abnormally large by historical standards. This happened when the labor market was overheating, especially for low-wage workers.

“This increase appears to have been mostly among undocumented immigrants, who we have shown on average enter low-wage industries and earn less than the average American worker,” Merkel explains. “This was perhaps more important than usual, because it helped a little to resolve the initial situation of supply-demand imbalance that was generating fairly severe wage pressures at the lower end of the distribution.”

In other words, the influx of immigrants at the lower end of the wage spectrum helped maintain a better equilibrium in the labor market at the lower end of the income spectrum, where the labor market was strongest and workers were hardest to come by.

However, Merkel stresses that immigration was not the only factor that played a role in normalizing wage pressures, nor was it the largest factor. He points to inflation shocks and the reopening of the global economy as the biggest reasons. He says that without the increase in immigration, “we would not have been able to create this number of jobs because we would not have found this number of people to employ.” GDP growth would have been lower because the labor force was growing a little slower. But do wage and price pressures look fundamentally different? no.”

Immigrants have supported employment and spending in the United States

Over the past few months, the economy has added far more jobs than it did in the days before the pandemic, raising concerns that the labor market may be on the verge of overheating.

newly paper Written by Wendy Edelberg, director of the Hamilton Project and a senior fellow in economic studies at the Brookings Institution, and Tara Watson, director of the Center for Economic Security and Opportunity at Brookings, find that massive immigration has actually increased the number of jobs the economy can sustainably absorb.

“We estimate that the labor market in 2023 can sustainably accommodate employment growth of 160,000 to 230,000,” they wrote. “This is still lower than the actual monthly increases in employment in 2023, but much lower than previously estimated.” For 2024, they expect sustainable employment growth to fall by between 160,000 and 200,000 jobs per month, double the level expected before the pandemic.

Edelberg and Watson also conclude that immigration helps explain some of the unexpected growth in consumer spending. They acknowledge that the increase — 0.1 percentage point in 2022 and 0.2 percentage point in 2023 and 2024 — is relatively small compared to the growth in overall spending over the same periods — 1.2% in 2022 and 2.7% in 2023 — but they add that “the effect helps to explain some Surprising strength in consumer spending They also point out that retail sales rose faster in states with larger immigrant populations.

Will immigration continue to affect the economy?

As inflation declines and job growth stabilizes, Merkel expects the effects of increased immigration to fade: “The starting condition now is a more balanced labor market than it was in 2022. I think we are back in a world where the traditional story that this is not a big deal for wage growth is likely to Inflation is right again.

But overall, analysts say the continued rise in immigration will still have a modest impact on the economy. For example, the Congressional Budget Office Expect Net migration rises until 2026 to boost GDP growth by about 0.2 percentage points annually over the next decade. “If immigration trends continue at high levels in 2024 as the Congressional Budget Office expects, employment growth and economic activity will likely continue to be affected,” Edelberg and Watson concluded.

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