How immigration is helping the economy defy expectations

Policymakers are increasingly citing the influx of immigrants and the strengthening of the U.S. workforce as key reasons for the economy’s strong performance in 2023.

The U.S. economy defied expectations last year by avoiding a widely expected recession, with real gross domestic product (GDP) growing 2.5%, unemployment remaining below 4%, and stock markets and corporate profits declining. Soaring to record highs, inflation has fallen off a cliff.

meanwhile, increase in money supply and Trillions of dollars in fiscal stimulus While immigration can be credited with averting the recession, a growing number of experts say immigration also helped stave off the recession by expanding the size of the workforce in ways not initially understood.

Federal Reserve Chairman Jerome Powell said at an event last week that immigration may be filling a gap in the explanation for why the economy has outperformed expectations.

“This actually explains what we’ve been asking ourselves: How was the economy able to grow more than 3% in a year when most outside economists were predicting a recession? “Is that so?” Powell said.

Inconsistencies in immigration data from various government agencies may be the reason why the labor market has repeatedly shown surprising upturns and shown so much strength, with 300,000 jobs created in March. Employment reached 96.2%, beating expectations of reaching 3,000 people.

Census Bureau estimates for 2023. This provides direct information. Fed monetary policyIt is estimated that the resident population growth was 1.7 million people, or 0.5 percent, with approximately 70 percent of that increase coming from immigration.

But recent estimates from the Congressional Budget Office (CBO) for the same year are about twice that amount. 3.3 million people immigrated to the US last year We will reach growth levels well above 1%. According to CBO projections, the United States is currently in the midst of a significant surge in net immigration.

“It’s clear there’s something here. The numbers are actually higher,” Powell said last week, attributing part of the unexpectedly strong economic performance to “a huge increase in the number of people working domestically.” said.

Experts say migration to the United States takes place in a variety of ways, with or without legal permission.

“Since COVID-19, there has been a significant rebound in legal immigration back to pre-pandemic levels, and in some cases exceeding it,” Julia Gellert of the Washington think tank Migration Policy Institute told The Hill. “There is,” he said.

“And with the recovery in mobility post-COVID-19, a number of local and global drivers, and a strong recovery in the United States, we have seen significant numbers of people cross our borders without authorization. economy.”

both workforce size and labor force Participation rate Both metrics are now closer to their pre-pandemic trend lines, although they have declined significantly due to the pandemic.

The prime-age participation rate for people between the ages of 25 and 54 is now 83.4 percent, near a 17-year high and a source of pride for the White House.

“Throughout 2023…the prime-age labor force grew by 0.7 percentage points compared to the calendar year, with an increase of 0.7 percentage points for women and 0.5 percentage points for men,” White House economists wrote in a January analysis. he pointed out.

Advocates focus on the role immigration has played in normalization.

“We cannot ignore the fact that immigrants’ contributions boosted job growth last month and are a gift to our economy,” Marisa Calderon, president of the economic advocacy group Prosperity Now, said in a statement Friday about the latest jobs announcements. I can’t.”

“Foreign-born people… filled open jobs in key sectors such as construction, hospitality, and leisure, while employment for the native-born remained stable,” she wrote.

The expansion of the labor force, from about 165 million people before the pandemic to about 168 million now, may also have played a role in the sharp decline in inflation. Inflation rate has fallen from 9% to 3.1% year-on-year. 2022.

When more people work, labor costs and associated prices could theoretically rise, but an increase in the number of workers could also reduce the demand for workers and lower wages for companies. Yes, policymakers have noticed this trend in recent months.

“How does inflation fall? Why? [the] The economic potential has actually increased, perhaps even exceeding actual production. So the economy is expanding, but it’s not tightening,” Powell said last week, adding that this was “really unexpected and unusual.”

wage growth And that employment costs There is little evidence that wage pressures contributed to post-pandemic inflation, but they started occurring around the same time as inflation.

at the same time, Productivity is on the rise This indicates that workers may be producing more relative to their costs.

The large increase in the immigrant workforce may be fueling this trend, especially since immigrants tend to earn less than native-born workers.

One 2016 Ministry of Labor investigation The median weekly wage for foreign-born workers was found to be only 83 percent of that of U.S.-born workers.

“The U.S.-born workforce has recovered significantly slower than the foreign-born workforce. Immigration has been the key. From a labor market perspective, immigration has been very good,” said Claudia Sahm, a former Fed economist. he said in a commentary on Friday.

“[Immigrants] They are filling jobs that employers have had a hard time filling. Early in the economic recovery, headlines were about labor shortages and how they were causing higher inflation through higher wage costs. You don’t see headlines like that now,” she wrote.