How immigration is helping the economy defy expectations

Policymakers are increasingly pointing to an immigration influx and a bolstered U.S. labor force as a main reason the economy did so well in 2023.

The U.S. economy defied expectations last year by avoiding a widely predicted recession, with real gross domestic product (GDP) growing by 2.5 percent, unemployment staying below 4 percent, stock markets and corporate profits surging to record highs, and inflation falling off a cliff.

While a boost in the money supply and trillions in fiscal stimulus can take much of the credit for avoiding a downturn, a growing number of experts say immigration also helped stave off recession by boosting the size of the labor force in ways that weren’t originally understood.

Speaking at an event last week, Federal Reserve Chair Jerome Powell noted that immigration may be filling an explanatory gap about why the economy outperformed expectations.

“That actually explains what we’ve been asking ourselves, which is how can the economy have grown over 3 percent in a year when almost every outside economist was forecasting a recession?” Powell said.

Conflicting immigration data from different government agencies may be a reason the labor market has repeatedly surprised to the upside and exhibited such strength, with job creation in March smashing expectations to hit 303,000 while employment ticked up to 96.2 percent.

Census Bureau estimates for 2023, which directly inform the Fed’s monetary policy, put the increase in the resident population at 1.7 million, or 0.5 percent, with about 70 percent of that jump coming from immigration.

But recent estimates by the Congressional Budget Office (CBO) for that year are about double that, with 3.3 million people immigrating to the U.S. last year to hit growth levels well above 1 percent. CBO projections show that the U.S. is currently in the middle of a marked spike in net immigration.

“It’s clear there’s something there — the numbers are actually higher,” Powell said last week, attributing a portion of the economy’s unexpectedly robust performance to “significantly more people working in the country.”

Experts say that migration to the U.S. is happening in different forms, both with legal authorization and without.

“We’ve seen a big rebound in legal immigration post-Covid back to, and in some cases above, the levels that we had before the pandemic,” Julia Gelatt of the Migration Policy Institute, a Washington think tank, told The Hill.

“We’ve also seen very large numbers of people coming across the border without authorization due to a rebound in mobility post-Covid, due to many push-factors in the region and around the world, and due to the strong recovery of the U.S. economy.”

While both the size of the labor force and the labor force participation rate dropped significantly in the wake of the pandemic, both metrics are now close to their pre-pandemic trend lines.

The “prime working age” participation rate, which looks at people between 25 and 54 years of age, is now near a 17-year high at 83.4 percent, a point of pride for the White House.

“Over the course of 2023 … the prime-age labor force saw continued growth, rising 0.7 percentage points over the calendar year — 0.7 for women and 0.5 for men,” White House economists noted in a January analysis.

Advocates are paying attention to the role that immigration has played in the normalization.

“We cannot ignore the fact that immigrant contributions drove job growth last month and are a gift for our economy,” said Marisa Calderon, head of economic advocacy organization Prosperity Now, in a Friday statement on the latest jobs release. 

“Foreign-born individuals … filled open jobs across key sectors including construction, hospitality and leisure, all while native-born employment remained steady,” she wrote.

The effects of an enlarged workforce, which stands now around 168 million workers compared to about 165 million prior to the pandemic, may also be playing a role in the precipitous drop in inflation, which has fallen to a 3.1 percent annual increase from 9 percent in 2022.

While having more people work could theoretically drive up the cost of labor and prices along with them, a larger pool of workers can also lessen the demand for workers and allow companies to pay less, a trend that policymakers have noticed in recent months.

“How does inflation come down? It’s because [the] potential capacity of the economy has actually moved up, perhaps more than the actual output. So it’s a bigger economy but not a tighter one,” Powell said last week, adding this was “really an unexpected and unusual thing.”

Wage growth and the cost of employment started coming roughly around the same time inflation did, though there has been little evidence that wage pressures made any contribution to the post-pandemic inflation.

At the same time, productivity has seen an upward trend over the past two years, indicating that workers could be producing more compared with how much they cost.

A significant increase in the immigrant workforce could be adding to these dynamics, especially because immigrants tend to make less money than their native-born counterparts.

One 2016 Labor Department study found that median weekly earnings of foreign-born workers were just 83 percent of the earnings of workers born in America.

“The recovery in the US-born labor force was notably slower than the foreign-born. Immigrants were key. From the lens of the labor market, immigration has been very good,” former Fed economist Claudia Sahm wrote in a Friday commentary.

“[Immigrants] are filling jobs that employers have struggled to fill. Early in the recovery, the news was covered with headlines about labor shortages and how they were causing higher inflation via higher wage costs. We don’t see those headlines now,” she wrote.