Immigration plays key role in booming US economy

New arrivals are filling the labour market and lowering inflation at a time when America's workforce is ageing

After the Covid-19 pandemic slashed jobs, immigrants have steadily been returning to the US workforce, generating economic growth and helping ease inflationary pressures. Getty Images

Immigrants are playing a vital role in the resilience of the US economy as it defies recession odds and tamps down inflation.

After the Covid-19 pandemic slashed jobs, immigrants have steadily been returning to the US workforce, generating economic growth and helping ease inflationary pressures.

The Congressional Budget Office projects increased immigration will continue through 2026, creating a large increase in the US labour supply.

This year, they are expected to contribute to the growth of the 1.7 million-strong workforce, the CBO reported.

In that same report, immigrants were projected to contribute $7 trillion in economic growth over the next decade.

“The contribution of the migrant workforce to the economy is significant. It has always been and continues to be,” said Dr Brenda Samaniego de la Parra, assistant economics professor at the University of California, Santa Cruz.

Immigration flows have also provided a crucial lifeline in the fight against inflation, which surged in 2022.

In an interview with 60 Minutes, Federal Reserve Chairman Jerome Powell acknowledged the return of immigrants to the workforce was a major part of the strength the labour market showed last year.

Federal Reserve Bank Chairman Jerome Powell testifies before the Senate in Washington. Getty Images / AFP

Finding balance

Mr Powell has often suggested the jobs market need to rebalance before the Fed can begin cutting back its benchmark interest rate range, which stands between 5.25 per cent and 5.50 per cent.

Amid the Covid-19 pandemic recovery, he and others have referred to the labour market as “tight”, with more job openings than available workers.

One year ago, there were 1.9 job openings for every available worker.

“Companies had a hard time recruiting,” said Dr Samaniego de la Parra. "They had to increase wages and then all of that increase, in turn, passed to consumer prices."

Migration flows have helped in finding this balance, where today there are 1.4 job openings for every available worker.

“So the fact that that exists, combined the return of labour for participation of immigration, makes it such that opportunities for immigration flows to be a source of relief for the labour market are higher,” she said.

An influx of migrants also carries some costs, including lower wages for native-born workers and a potentially higher unemployment rate

“The debate is whether the benefits outweigh the costs … I think those concerns are potentially outweighed right now by just how tight markets have been,” Dr Samaniego de la Parra said.

And a new report from the Brookings Institution found that the labour market may not have been as tight as previously thought because of the rise in immigration.

The study's co-author, Dr Wendy Edelberg, director of the Hamilton Project and senior fellow in economic Studies at Brookings, said the findings led her to believe that the jobs market did not need to slow as much as previously thought to reach a sustainable pace in growth.

“Maybe employment was expanding so much in large part because immigration was expanding so much, and a lot of people were showing up saying they want jobs and they were also spending money and the economy expanded to absorb them,” she said.

“Maybe the labour market was expanding because supply was expanding in a way that does not create inflationary pressure.”

Dr Edelberg said recent government data, which shows the US has added 230,000 jobs on average over the past 12 months, puts it within “spitting distance” of sustainable growth when factoring in immigration flows.

“My hope is that the Federal Reserve is paying close attention to what's happening to immigration.”

Replenishing an ageing workforce

The US, like other big economies, is facing an ageing problem.

For decades, the Baby Boomer Generation – those born between 1946 and 1964 – have made up most of the US labour force.

But as they begin to retire, they leave a gap in the labour force participation rate, which is the percentage of the population either working or looking for a job.

This metric shows the supply of labour available to produce goods and services. Declining labour force participation typically slows gross domestic product growth because there are fewer people contributing to economic output.

This also creates a dependency problem, because more people would need support for social programmes.

In the US, the labour force participation rate has dropped a full percentage point to its current level of 62.5 per cent, mainly because of the ageing population, but Covid-related deaths and declining fertility rates have also played a role.

Recent immigration flows “more than offset” these declining trends, Dr Edelberg said.

Immigrants' share in the workforce has steadily climbed in recent years, with the foreign-born participation rate having accelerated past that of native-born workers.

In September, the foreign-born participation rate was 67.1 per cent compared with the native-born rate of 61.8 per cent.

Foreign-born workers account for about 19 per cent of the US labour force today.

And net immigration is expected to account for most of the projected size of the US labour force in 2033, which is estimated to grow by another 5.2 million people, the CBO said.

The office expects that the labour force participation rate will grow moderately through 2026, with increased immigration “more than” offsetting the slower demand for workers and the ageing population.

Many of those immigrants are expected to be in the prime working years of 25 to 54 years old.

“But those predictions are very, very dependent on what happens to policy,” Dr Edelberg said.

Looking ahead

What immigration policy means for the future of the economy remains far from certain as the US braces for a presidential election between presumptive Democratic and Republican nominees Joe Biden and Donald Trump.

And with the US southern border a central issue to most voters this year, Mr Biden and Mr Trump are trying to appear tough on immigration.

But it is the former president whose immigration views cast the most uncertainty.

As he seeks a return to office, Mr Trump has floated the possibilities of re-enacting harsh immigration laws, such as turning away asylum seekers at the border and his so-called Muslim ban.

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A 2023 study from the Cato Institute also found the population with roots in Mena in the US to have a higher labour force participation rate than white Americans.

Of the roughly 3.8 million Mena-connected residents in the US in 2021 - of which more than half is foreign-born - about two million were in the workforce, equating to a labour force participation rate of 65 per cent.

“Abruptly cutting off immigration would have significant effects on how fast our economy can grow, how fast your labour force can grow,” said Dr Edelberg, who noted the need for immigration reform in the US.

Dr Samaniego de la Parra said hardening immigration laws to such a degree would be “a dire scenario in many respects”.

Such an effect would not only be felt in the aggregate output of he economy, but would also restrict labour mobility and access to higher education, affecting those seeking entry-level positions and higher-paying jobs.

“We could see these big drops that affect not just the labour market but even in innovation in the US, so that could be very harmful,” Dr Samaniego de la Parra said.