Immigrants help keep job growth high as inflation cools

Immigrants help keep job growth high as inflation cools

U.S. President Joe Biden greets members of the U.S. Border Patrol at the U.S.-Mexico border in Brownsville, Texas, U.S., February 29, 2024.

Kevin Lamarque | Reuters

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

A blockbuster May jobs report showed that the U.S. 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 remained unchanged, and even fell slightly on an annual basis.

This dynamic — a heating job market and cooling inflation — is in part the result of increased inflows of immigrants.

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

A “Now Hiring” sign is seen at a FedEx location in New York City, June 7, 2024.

Michael M. Santiago | Getty Images

The May jobs report found that government, leisure and hospitality, and health-care sectors saw the most growth.

Holding down inflation

“The immigration surge poses lots of challenges to communities across the country, but it came at a very fortuitous time to help ease the labor market pressure, when the Fed was working hard to do it by interest rate hikes,” Moody’s Chief Economist Mark Zandi told CNBC.

Typically, a hot labor market walks a tightrope that could easily collapse into reheated inflation.

That is because higher job gains risk depleting the labor supply. This forces businesses to raise wages to compete for workers, which increases producers’ costs and eventually ripples into higher consumer prices and inflation.

But recent spikes in immigration at the southern border and elsewhere in the U.S. have helped keep the labor pool full even as job gains kept apace.

“We’ve seen labor force supply come up quite a bit, through immigration, through recovering participation,” Federal Reserve Chair Jerome Powell said last Wednesday at the central bank’s press conference following its widely expected decision to keep interest rates flat.

Fed Chair Jerome Powell: Economic outlook uncertain, we remain highly attentive to inflation risks

Absorbing new jobs

In recent years, higher immigration inflows have effectively doubled the number of new jobs the U.S. economy is capable of absorbing every month without overheating, a March analysis from the Brookings Institution found.

Before the pandemic, congressional forecasters predicted that in 2024, the U.S. job market would be able to absorb between 60,000 and 100,000 new jobs a month without triggering an inflation spike.

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

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

By the Brookings numbers, the May jobs data would still be too hot for comfort and so would the 0.4% monthly increase in average hourly earnings over April.

But the gap between how many jobs are being created and the maximum number the U.S. economy can absorb without triggering inflation is much slimmer than it might have been without recent influxes of immigrants.

U.S. President Joe Biden speaks about the economy at the International Brotherhood of Electrical Workers Local 26 union, in Lanham, Maryland, on Feb. 15, 2023.

Mandel Ngan | Afp | Getty Images

Biden cited both the May jobs report and the steady CPI as evidence of what he calls 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 statement on June 7. “Unemployment has been at or below 4% for 30 months — the longest stretch in 50 years.”

It was the latest iteration of Biden’s optimistic campaign pitch to voters about the U.S. economy.

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

Political flash points

Republican presidential candidate and former U.S. President Donald Trump reacts during a campaign event, in Las Vegas, Nevada, U.S. June 9, 2024. 

Brendan McDermid | Reuters

It is difficult to quantify the massive impact Trump’s policy would have on the U.S. economy if it were to survive legal challenges and actually be carried out.

In the short-term, however, analysts believe the labor market has recovered enough from the pandemic to weather a potential decline in immigration, though it would still impact U.S. productivity levels.

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

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

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