The unveiling of new immigration estimates by the Congressional Budget Office has added a crucial piece to the economic puzzle, shedding light on the unexpected vigor of the U.S. economy amid recession forecasts. Federal Reserve Chairman Jerome Powell remarked, “The numbers are actually higher, and that actually explains what we’ve been asking ourselves.” The U.S. economy has staged a remarkable recovery from the pandemic, defying recession fears as economic indicators consistently surpassed projections. However, some indicators, such as employment growth and consumer spending, appeared excessively robust, prompting concern among economists, including those at the Federal Reserve tasked with managing inflation.
The revised immigration estimates provided by the CBO offer insight into this atypical economic rebound, suggesting that the labor market may not require significant slowing to curb inflation. Initially, in 2019, the CBO projected net immigration for 2023 at 1.0 million individuals. However, the latest estimates reveal that net immigration in the previous year amounted to 3.3 million people, indicating a faster population and labor force growth than anticipated by statistical agencies and economists.
The influx of immigrants has implications for employment dynamics, potentially allowing for faster employment growth than previously assumed. This accelerated growth, exceeding what the labor market can effectively accommodate, may drive up wages and prices, thereby contributing to inflationary pressures. Adjusting prior labor market assumptions, it’s evident that sustainable monthly employment growth in 2023 could have ranged from 160,000 to 230,000, accounting for the higher immigration figures.
This revelation diminishes concerns about employment growth overheating and its impact on prices. With strong immigration trends expected to persist, employment growth of nearly 200,000 workers per month is deemed consistent with a healthy labor market, nearly double the sustainable rate without increased immigration.
Beyond employment, heightened immigration levels also influence other aspects of economic recovery. A larger population translates to more consumers, driving up real consumer spending by $46 billion last year alone. Moreover, increased immigration directly contributed to real GDP growth by 0.1 percentage point in 2022 and 2023, with projections indicating further boosts to consumer spending and GDP growth in the coming years.
While increased consumer demand may elevate prices and wages in specific sectors, the overall impact on aggregate inflation is mitigated by the accompanying rise in production capacity. Consequently, the extra economic capacity afforded by increased immigration alleviates pressure on the labor market and reduces the need for aggressive measures to control inflation.
Looking ahead, immigration remains integral to sustaining long-term economic growth, especially amid demographic shifts marked by an aging population and declining birth rates. Immigration not only addresses labor force shrinkage but also bolsters fiscal sustainability, with immigrants projected to contribute significantly more in taxes than they receive in benefits over 75 years.
However, the benefits of immigration must be balanced against the immediate fiscal strains experienced by some states and localities. Proposals to redistribute federal gains from immigration to affected communities could alleviate resource pressures and foster greater acceptance of immigrants.
To fully harness the economic advantages of immigration, policymakers must modernize immigration pathways to align with present-day economic realities. The current immigration system, largely unchanged since 1990, lacks flexibility to accommodate the needs of a burgeoning economy and evolving labor market. Addressing these shortcomings requires expanding legal immigration avenues and reimagining enforcement mechanisms to align with economic imperatives.
Despite challenges, the economic rationale for immigration expansion is clear. Congress must seize the opportunity to enact comprehensive immigration reform, recognizing both the humanitarian imperative and the economic dividends associated with welcoming migrants. Failure to act could not only jeopardize recent economic gains but also compromise the future vitality of the U.S. population and economy.
