Discover more from Just Think, by Marco Annunziata
After yesterday’s stellar employment report I found myself wondering once again, wait, why do we need looser monetary policy? The data confirmed that the labor market is strong and the US economy resilient. The economy added over 250k jobs against market expectations of just 150k; previous numbers were revised up; unemployment declined to 4.1%; wages grew faster than expected (an over 4% annualized rate). So much for the various economic “rules” that have been predicting a recession for way too long — voodoo economics.
This strength has been partly fueled by immigration; here I want to discuss the impact on employment — and unemployment — and the potential implications for policy.
Not born in the U.S.A.
The US foreign-born population rose from under 42 millions at the end of 2020 to nearly 49 million last August — a nearly one-fifth jump in less than four years.
Source: U.S. Census Bureau
This partly reflects the illegal influx at the southern border, where U.S. Customs and Border Protection recorded over 8.6 million encounters since the start of 2021. I addressed this in a post earlier this year, and here is the updated chart:
Source: U.S. Customs and Borders Protection
foreign-born workers gave a disproportionate boost to employment, which helped bring inflation down even as the economy kept growing at a robust pace.
Set aside the many issues concerning illegal entry. Immigration has given a substantial contribution to the post-pandemic recovery, helping supply catch up with demand: the share of foreign-born workers in the labor force rose sharply from its pre-pandemic peak, to nearly 20% of the total in August. That’s 4.2 million workers.
Source: U.S. Census Bureau
A similar trend can be seen in employment:
Source: U.S. Census Bureau
Most people who move to the US, legally or illegally, do so because they seek opportunity. They want to work. The foreign-born participation rate (share of working age people who are working or looking for a job) has been consistently higher than for the native born population.
Source: U.S. Census Bureau
This difference has stepped up from about 4pp during the 2010s to 5pp over the past three years (chart below), as the foreign born (re-)joined the labor force at a much faster pace than the native-born (chart above).
Source: U.S. Census Bureau
In sheer numbers, foreign-born workers gave a disproportionate boost to employment, which helped bring inflation down even as the economy kept growing at a robust pace.
A mixed blessing?
The economy, however, will not stay strong forever. What happens when a downturn materializes? In the September FOMC press conference, Powell made a reference to immigration that attracted surprisingly little attention.
“So, on the job creation, it depends on—it depends on the inflows, right? So, if you’re having millions of people come into the labor force then, and you’re creating 100,000 jobs, you’re going to see unemployment go up. So it really depends on what’s the trend underlying the volatility of people coming into the country. We understand there’s been quite an influx across the borders, and that has actually been one of the things that’s, that’s, that’s allowed the unemployment rate to rise.”
Once the economy slows, how fast unemployment rises will depend on how many new people are joining the labor force. Imagine we went back to a period like 2000-2007, which was not bad at all — the economy expanded at an annual average of close to 3%, with economists and policymakers patting each other on the back for achieving the “Great Moderation”. Over those eight years, non-farm payrolls grew on average by less than 80,000 per month. Over the last four years or so, about 63,000 foreign-born workers joined the labor force every month. You see where I’m going with this, right?
Should the Fed have to address the insufficient job creation south of the border?
When the US economy slows, fewer immigrants tend to come. But uncontrolled immigration could still mean fast-rising unemployment. Since the Fed’s dual mandate includes full employment, immigration could force a looser policy stance, as Powell alluded in the remarks above. Given the potentially unlimited supply of immigration, this is not a theoretical issue — it is obviously on the Fed’s mind. Should the Fed have to address the insufficient job creation south of the border?
Wait, what about the robots?
Ah. I thought you’d never ask. Well, robots need jobs too, don’t they? Economists and technologists certainly think so — they’ve been busy predicting a devastating impact on the labor market. So far their predictions have been delightfully off the mark: In 2013, Oxford economists predicted that automation would wipe out half of all US jobs within a couple of decades. We’re more than half way through, so by their reckoning we should have lost close to 40 million jobs — instead employment has risen by more than 20 million — that’s a 60 million miss, which makes me feel a lot better about of my own wrong forecasts…
Earlier this year the IMF warned that AI will “affect” 40% of all jobs around the world — “affect” is suitably vague, but suggests massive job losses. The IMF loves to ride fad waves, so this prediction is likely to prove similarly embarrassing. Luckily some economists are now offering a more sober assessment: MIT’s Acemoglu recently said AI could take over (or “heavily aid”) at most 5% of jobs over the next decade.
So far the evidence has vindicated the more sober economics wisdom: the impact of technology on jobs will be limited to a subset of occupations; over time the economy will create more and better jobs; policymakers should focus on cushioning the transition with adequate unemployment benefits and, where possible, jobs retraining programs.
But if robotics and AI do start to have a more serious and widespread impact on jobs, the monetary policy implications will be fraught. We might have to revise the natural rate of unemployment up significantly, and the Fed might need to keep a tight monetary stance even with unemployment at say 9%.
Economic opportunity and social cohesion — or else
Automation might eventually exacerbate the problem, but the implications of immigration are already a real and present concern. Discussions of monetary policy tend to take the labor market as a black box — but with big demographic changes we need to take a closer look at what’s driving labor supply.
This is not just a dry economics discussion. Pressure on economic resources spills over into society at large. Just look at Europe, where heavily regulated labor markets make it a lot harder for immigrants to find work. As a consequence, the rise in immigration triggered by former German Chancellor Angela Merkel’s famous “wir schaffen das” (we can do this) has not had the positive economic impact we’ve seen in the US — quite the opposite. Support for genuinely far-right political parties is rising fast across the old continent, including awkwardly in Germany itself and Austria, while in England we see the first signs of communal violence.
I am an immigrant, and there is no doubt in my mind that immigration has been and remains key to keeping the US more dynamic, prosperous and innovative than Europe. Maintaining strong opportunities to work and strong incentives for social cohesion, however, is of paramount importance, as I noted in a previous post. So is a more thought out and deliberate immigration policy. Otherwise immigration might become an economic and social headache when the economy does lose steam. The cautionary tales are unfolding before our eyes across the Atlantic.
Opening photo credit: Photo by Barbara Zandoval on Unsplash
Subscribe to Just Think, by Marco Annunziata
Stepping away from groupthink, with a focus on economics and innovation
Very interesting. And here's a random idea. What if the Fed's mandate were shifted to target full employment only for documented immigrants and citizens. I can easily see that idea taking hold in a Republican Congress. Thus, the Fed wouldn't need to loosen so much if employment levels for citizens and green-card holders were stable. Of course, it would have had to tighten much more to wring out the notional wage inflation that would have occurred without the undocumented immigrants. Recession more likely either way?