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Immigrants power job growth, help tame inflation. But is there a downside for the economy?

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Immigrants power job growth, help tame inflation. But is there a downside for the economy?

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The surge into the U.S. of immigrants lacking permanent legal status has emerged as one of the most politically charged issues of the 2024 presidential election.

Yet the wave of new arrivals has boosted the U.S. economy while helping temper inflation, a top issue for voters.

“It (immigration) is helping to reduce the labor shortage and push down wage pressures” that have fueled price increases, says economist Michael Reid of RBC Capital Markets.

Strong job growth and lower inflation make for an unusual, best-of-both-worlds tandem that has helped the nation avoid a recession.

Yet some recent studies question whether immigrants really have tamped down consumer price increases after figuring in their demand for products and services, which tends to push up prices. And Republicans argue immigrants are taking jobs from Americans, a contention Democrats refute.

At a hearing last week, Sen. J.D. Vance, R-Ohio, who Monday was announced as former President Donald Trump’s running mate on the Republican presidential ticket, suggested immigrants are depressing Americans’ wages.

Trump, meanwhile, would severely restrict U.S. entry at the southern border and he has proposed deporting millions of migrants living in the country without legal permission. Even conservative economists have said the strategy would reverse much of the progress on labor shortages and inflation.

President Joe Biden also wants to toughen enforcement at the border with Mexico but his plan is not as sweeping and he has not proposed mass deportations. Analysts say his blueprint would broadly return net immigration to its pre-pandemic level of about 1 million a year while Trump’s would result in about half that inflow.

Here’s a look at the debate:

How many immigrants enter the US per year?

The Congressional Budget Office recently estimated net immigration to the U.S. was 2.6 million in 2022, 3.3 million in 2023, and a projected 3.3 million this year. The figures are much higher than previously believed and above the 900,000 average from 2010 to 2019.

About 2.4 million of the entrants were unauthorized, the CBO says, with the vast majority entering at the southern border.

How is the US economy affected by immigration?

Immigrants are doing work that lifts production, and earning income to buy homes, cars, groceries, clothing, health care and other products and services that expand the nation’s economy.

In other words, they’ve helped keep the nation from slipping into a recession that was widely anticipated last year because of high inflation and interest rates.

In a study last week, the Federal Reserve Bank of Dallas estimated immigration is increasing annualized economic growth in a given quarter by 0.7 percentage points at an annual rate. That means it could have comprised half of the tepid 1.4% annualized increase in growth early this year.

A JPMorgan Chase analysis of immigration in 23 developed countries from 1990 to 2020 found that a 1% annual increase in population from immigration – roughly in line with the U.S. gain last year – would boost economic growth by 1.6 percentage points. That’s about half last year’s 3.1% rise in U.S. gross domestic product.   

Others say the immigration-induced GDP bump is more modest. A Brookings Institution report estimated it added a tenth of a percentage point to growth in 2022, two-tenths in 2023 and a projected two-tenths this year.

What percentage of jobs is filled by immigrants?

Foreign-born people come to the U.S. at relatively young ages and 64% to 66% are in the labor force – meaning they’re working or looking for jobs − compared to about 60% of U.S. natives, according to JPMorgan Chase and the Brookings Institution.

Of the 3 million jobs the nation added last year, about a third likely went to newly arrived immigrants, most of who entered the country illegally, RBC Capital Markets estimates.

Can immigration fix labor shortages?

The nation grappled with severe post-pandemic labor shortages from 2021 to 2023. To attract workers, employers pushed up the annual rise in average hourly pay to a peak of 5.9% in early 2022 from 3% before the pandemic.

The influx of immigrants helped ease the worker shortages and tamp down wage growth to about 4%. The gains have especially aided some low-paying industries that struggle most to attract employees, economists say. From December 2021 to December 2023, immigrant employment in leisure and hospitality – which includes restaurants and hotels – increased by 5.5 percentage points, reducing the share of job vacancies by 4.4 percentage points, according to a study by the Federal Reserve Bank of Kansas City.

Employers, in turn, could compete less vigorously for workers, and annual wage growth fell by 3.9 percentage points – accounting for early half the drop in the industry’s pay increases during the two-year period, from 13.9% to 4.1%.

Across the labor market, Deutsche Bank estimates the immigration spike over the past four years has increased the number of people employed − and reduced total job vacancies − by as much as 3.9 million, easing wage pressures that intensify inflation.

How does wage growth affect inflation?

As businesses passed their higher labor costs to consumers, prices soared, especially for services such as dining out, health care, auto repair and haircuts.

Pandemic-related supply chain troubles also fueled inflation by pushing up the price of goods such as furniture, appliances and cars.

Without the immigration spike, the Federal Reserve’s preferred annual inflation measure, which fell from a peak of 5.6% in 2022 to 2.8% in the first quarter, would have been as high as 3.1% to 3.3%, a Deutsche Bank analysis says.

The quarter-to-half-point inflation decline spurred by immigrants is in line with the 0.37 percentage point slide estimated by the Center for Immigration Studies, an anti-immigration think tank.

“It’s too small to make a dent in overall inflation,” says Jason Richwine, resident scholar at the center.

But the pullback is still “notable” and has significant implications, Reid, of RBC Capital Markets, says. After raising its key interest rate to a 23-year high of about 5.1% to fight inflation, the Fed is widely expected to begin cutting interest rates in September, lowering the cost of mortgages and other loans while juicing the stock market.

Absent the immigration surge, inflation likely would have hovered above 3% for several additional months, leading the Fed to keep rates higher for longer and raising the odds of a recession, Reid says.

Do immigrants take jobs from Americans?

At his debate with Biden last month, Trump said many of the jobs immigrants were taking otherwise would be filled by American citizens, particularly Black and Hispanic people.

Reid, though, says U.S.-born workers often aren’t interested in many of the arduous, low-paying jobs sought by immigrants who lack permanent legal status. And Americans generally don’t want for jobs. The share of employed prime-age (25-54) people born in the U.S. is at 83%, higher than before the pandemic, Jason Furman, former chairman of the Council of Economic Advisers, wrote in a recent opinion piece in the Wall Street Journal.

Are immigrants depressing wages for Americans?

At a Senate hearing last week, Vance acknowledged immigration has helped ease the labor crunch and slow wage growth. But, he told the witness, Fed Chair Jerome Powell, “It also puts downward pressure on the wages that people earn for their families. Why do we see that as a good thing?”

Instead of relying on immigration, he suggested, employers should have jacked up wages high enough to attract more Americans to their job openings. Presumably, pay increases would then moderate as labor gaps closed.

In a March report, Michael Feroli, chief U.S. economist of JPMorgan Chase, agreed that “wage gains for lower-skilled workers could suffer” because of immigration.

But remedying labor shortages by hiking wages even more sharply for Americans wasn’t practical in many cases, Reid said. The deficits were so severe that there were two jobs for every unemployed worker and many firms couldn’t fill vacancies even with big pay bumps.

Many people with the right skills didn’t live near the jobs and were unwilling to move, he said. Others were reluctant to work because they were still benefitting from pandemic-related stimulus checks and other savings. And if businesses raised wages so high that Americans on the sidelines couldn’t resist the offers, lots of companies wouldn’t be profitable, Reid says.

Can immigration cause inflation?

Yes. By stoking more consumer demand for products and services, immigration also fuels inflation. And immigrants are more inclined than people born in the U.S. to spend most or all of their income, Feroli wrote in the report.

The effect on prices is especially pronounced in housing, with new immigrants needing as much as 500,000 additional units a year, Feroli says. In June, rent and other housing costs made up about 36% of the monthly inflation rise, according to the consumer price index. The nation already is beset by a big housing shortage and it takes time for developers to respond to unexpected immigration spikes by building homes, Feroli says.

At the same time, because most immigrants living in the country without legal permission work in low-wage industries, they spend less overall than those born in the U.S., Reid says. Immigrants, he says, also send an average of $160 a month to their families in their native countries.

The bottom line?

Normally, the effects of an immigration surge on inflation are a wash or may even increase it in the short term, JPMorgan economists Alexander Wise and Jan Loeys wrote in a note to clients. Besides the purchases by new foreign-born residents, immigration gooses demand from companies that need to buy computers, factory machines, or other equipment for their newly hired immigrant workers, the Dallas Fed paper says.

Yet during dire labor shortages, such as the recent episode, immigration may ease inflation because the benefits of expanding the supply of workers outweigh the jolt to household spending, Wise and Loeys suggested.

Do immigrants have a positive net impact on the economy?

Many economists think so. Normally, strong job growth triggers faster price increases by forcing employers to bid up wages to attract a limited pool of U.S. workers and by increasing consumer spending.

The immigration wave, though, “has provided a significant boost to GDP without a corresponding rise in inflation,” says Ron Mau, an economist at the Dallas Fed.

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