Immigrants help keep job growth high while 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. labor market continue a fiery run in recent months without reigniting inflation, economists and analysts say. The result was a favorable but uncertain situation for President Joe Biden in the run-up to the November elections.

A landmark May jobs report showed 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 were unchanged in May and even fell slightly year-over-year.

This dynamic – a warming labor market and cooling inflation – is partly the result of the increased influx of immigrants.

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

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

Michael M Santiago | Getty Images

The May jobs report showed that healthcare, government and leisure and hospitality sectors saw the most growth.

Suppressing inflation

“The wave of immigration poses many challenges to communities across the country, but it came at a very fortuitous time to help alleviate pressure on the labor market as the Fed pushed hard with rate hikes,” said Mark Zandi, chief economist at Moody's . told CNBC.

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

That's because higher job gains come with the risk of depleting the labor supply. This forces companies to raise wages to compete for workers, which increases producer costs and ultimately leads to 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 supply full even as job growth has continued apace.

“We have seen a significant increase in the supply of labor, through immigration and through the recovery of participation,” Fed Chairman Jerome Powell said at the central bank's news conference on Wednesday, after the widely expected decision to keep interest rates low.

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

While Biden's critics have focused on the high-profile political risks of the humanitarian crisis caused by migration spikes in the country At the southern border, the picture that economists paint of immigration is very different.

In short: immigrants can ensure economic recovery in the US.

Absorbing new jobs

In recent years, higher immigration inflows have effectively doubled the number of new jobs the U.S. economy can absorb each month without overheating, a March analysis of the U.S. economy found. Brookings Institution found it.

Before the pandemic, congressional forecasters predicted that the U.S. labor market could absorb between 60,000 and 100,000 new jobs per month by 2024 without causing a spike in inflation.

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

But the Brookings researchers recalculated the government's estimates, this time taking into account the impact of immigrants on the labor market. They found that the US labor market could safely absorb between 160,000 and 200,000 monthly job gains by 2024 with immigration.

According to the Brookings figures, May's jobs numbers would still be too hot for comfort, and so would the 0.4% monthly increase in average hourly wages in April.

But the gap between the number of jobs created and the maximum number the U.S. economy can absorb without causing inflation is much smaller than it would have been without the recent influx of immigrants.

US President Joe Biden speaks at the International Brotherhood of Electrical Workers Local 26 union on February 15, 2023 in Lanham, Maryland.

Mandel Ngan | Episode | 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 come with a job,” Biden said in a statement on June 7. 'Unemployment has been at or below 4% for thirty months – the longest stretch in fifty years. “

It was the latest version of Biden's optimistic campaign pitch to voters about the US economy.

For the White House, this is a crucial argument for the president to make, part of a broader fight to change the perception among some Americans that Biden is responsible for the high cost of living.

Political flashpoints

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

Brendan McDermid | Reuters

It is difficult to quantify the enormous impact Trump's policies would have on the American economy if they survived legal challenges and were actually implemented.

In the short term, however, analysts believe the labor market has recovered enough from the pandemic to withstand a potential drop in immigration, although this would still impact US productivity levels.

“As the labor market returns to better balance… moderate swings in immigration should have little impact on headline wage growth and inflation,” Goldman Sachs analysts wrote in a May report.

“However, immigration levels will continue to exert a mechanical influence on the real economy, and in particular on potential job and GDP growth,” they wrote.

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