How immigrants are helping to sustain job growth as inflation cools

Immigration — authorized and unauthorized — has helped the U.S. labor market maintain a buoyant run in recent months without reigniting inflation, economists and analysts say. The effect has been a favorable, if uncertain, situation for President Joe Biden ahead of the November election.

A strong May jobs report showed the US economy added 272,000 jobs last month, well above the Dow Jones forecast of 190,000. Meanwhile, the Bureau of Labor Statistics reported last week that consumer prices in May were unchanged, even falling slightly on an annual basis.

This dynamic of “a labor market for heating and cooling inflation” is partly the result of increased inflows of immigrants.

“Recent immigrants have flowed disproportionately into parts of the labor force that were particularly tight in 2022, contributing to labor supply in places where it was most needed,” Goldman Sachs analysts wrote in a note to clients in May. .

May’s jobs report found that the government, leisure and hospitality and health care sectors saw the biggest increases.

“Increased immigration poses many challenges for communities across the country, but it came at a very fortuitous time to help ease labor market pressure, when the Fed was working hard to do so by raising interest rates. ,” Moody’s Chief Economist Mark Zandi. told CNBC.

Typically, a hot job market walks a tightrope that can easily collapse into reheated inflation.

This is because higher job gains risk depleting the labor supply. This forces businesses to raise wages to compete for workers, which increases producer costs and ultimately leads to higher consumer prices and inflation.

But recent increases in immigration to the southern border and elsewhere in the US have helped keep the labor force full, even as job gains have kept pace.

“We’ve seen the labor supply increase quite a bit, through immigration, through the recovery in participation,” Federal Reserve Chairman Jerome Powell said last Wednesday at the central bank’s news conference after its expected decision to hold rates. of flat interest.

Zandi also credited immigration for helping the United States maintain a positive GDP. “It has reduced the need for more rate hikes and has probably been critical in ensuring that the economy has avoided a recession,” he said.

While Biden’s critics have focused on the high-profile political responsibilities of the humanitarian crisis caused by increased immigration at the southern border, the picture economists paint of immigration is very different.

They say immigrants can protect the US economic recovery.

In recent years, higher immigration flows have effectively doubled the number of new jobs the US economy is able to absorb each month without overheating, a March analysis by the Brookings Institution found.

Before the pandemic, congressional forecasters predicted that in 2024, the US labor market would be able to absorb between 60,000 and 100,000 new jobs per month without causing a spike in inflation.

Based on this model, the 272,000 jobs added to the US economy in May would have set off alarm bells.

But Brookings researchers recalculated the government’s estimates — this time, factoring in the impact of immigrants on the workforce. They found that with immigration, the 2024 US labor market could safely absorb between 160,000 and 200,000 monthly job gains.

According to Brookings numbers, May’s jobs data would still be too hot for comfort, and so would the 0.4% monthly increase in average hourly earnings during April.

But the gap between the number of jobs being created and the maximum number the US economy can absorb without causing inflation is much smaller than it would be without the recent influx of immigrants.

Biden cited both the May jobs report and the steady CPI as evidence of what he called “a great American comeback.”

“On my watch, 15.6 million more Americans have the dignity and respect that comes with a job,” Biden said in a June 7 statement. “Unemployment has been at or below 4% for 30 months – the longest stretch in 50 years.”

It was the latest iteration of Biden’s upbeat campaign pitch to voters about the American economy.

For the White House, this is a critical case for the president, part of a broader battle to change perceptions among some Americans that Biden is to blame for the high cost of living.

With the November election looming, the positive impact that immigration appears to have on the American economy is being largely drowned out by the strongest voices on this complex issue.

However, one thing everyone agrees on is that the outcome of the presidential election will greatly affect border policy and the flow of American immigrants.

Biden’s latest executive action to increase restrictions on asylum seekers could threaten the economic backbone that immigration is providing. But the policy is still working through implementation glitches and legal challenges, delaying its full impact.

Meanwhile, former Republican President Donald Trump has vowed that if elected for another term, he will carry out mass deportations of between 15 and 20 million immigrants living in the United States without authorization.

It’s hard to quantify the massive impact Trump’s policy would have on the US economy if it survives legal challenges and is actually implemented.

However, in the short term, analysts believe that the labor market has recovered enough from the pandemic to withstand a possible decline in immigration, although this will still affect productivity levels in the US.

“With the labor market now in better balance…moderate fluctuations in immigration should have little impact on overall wage growth and inflation,” Goldman Sachs analysts wrote in a May report.

“Immigration levels, however, will continue to mechanically affect the real economy, namely potential jobs and GDP growth,” they wrote.