The central economic mystery of the post-pandemic United States is how, in the tightest labor market in decades, employers continue to add jobs every month – even as record-high inflation steadily declines.
Nobel Prize-winning economist Paul Krugman has a simple answer to this question: it’s immigration, stupid.
“The economy is moving forward, creating a lot of jobs, inflation is now essentially in the rearview mirror, and there is no hint of all the terrible things that were about to happen,” Krugman said New Republic“Daily Explosion” podcast on Sunday.
The main reason employers have been able to keep hiring without fueling inflation is because the workforce is growing, Krugman said.
“How much of the growth in the labor force comes from foreign-born workers? How much of the increase since 2020 comes from foreign workers? The answer is everything,” he said, adding that every aspect of the US’s superiority over other developed countries is due to its ability to grow rapidly thanks to its foreign-born workforce.
Immigration to the USA sank slightly early in the Trump administration and then fell sharply in 2020 due to COVID restrictions before rebounding two years later. This is reflected in the labor force data: As of this month, there were 3.1 million more immigrant workers in the labor force than before the pandemic. Meanwhile, the local labor force grew by 1.5 million above pandemic levels last summer but has since fallen to below that level.
“The fallout from the pandemic-era immigration shutdown has created one of the tightest labor markets we’ve ever seen, and it has begun to cool as labor becomes more available,” said Aaron Terrazas, chief economist at Glassdoor. Luck. “Correlation is not causation, of course, but it’s a natural way to think about it.”
That’s significant for the Federal Reserve as the Fed keeps a close eye on the labor market when deciding where to take interest rates, even though raising worker pay is only partly responsible for the pandemic spike in inflation.
“The economy not only continues to grow, but also appears to be accelerating; inflation fell again from around 9% to almost 2%. This is largely due to a greater recovery in the labor force and rising productivity,” said Andrew Hunter, Deputy US Secretary of State. economist in Capital Economics, which also point to rising labor force participation among women, particularly mothers, as a surprise factor. “This has helped maintain high growth rates and also keep inflation in check. This is something few people predicted.”
But doesn’t adding 3 million foreign-born workers mean those jobs won’t go to American-born workers? “Well, no,” says Krugman.
“They’re not stealing jobs from Americans,” he told the Daily Blast.
Foreign-born workers tend to have different skills and work in different industries, and so “they are not ideal replacements for American workers,” Krugman added. “What they do is open up space for hotter management of the economy, and will almost certainly actually lead to higher employment among people born here.”
Here’s one example of how this can work. Immigrants are widely represented in the care sector as nannies, au pairs, home assistants and nursing home assistants. By caring for the children and homes of middle- and upper-class Americans (at fairly low cost), immigrants enable middle-class women to take on better-paying jobs in the labor force.
In fact, according to the National Bureau of Economic Research, immigration has helped close the gender pay gap in powerful industries without requiring lower birth rates among native-born middle-class women. working paper Patricia Cortes. Immigration also makes it easier for people to age in place by lowering the costs of home health care and landscaping. NBER document found.
“It is a market intervention that makes these services available to middle-class and high-income households, but [it creates] competition for the people providing the services as well,” Terrazas said. Other examples include low-wage health care workers, as well as agriculture, where low food prices are made possible by the backbreaking labor and low wages of thousands of immigrants and temporary foreign workers.
“We don’t have a uniform immigration policy; we have different policies for different skill levels,” Terrazas added. Choosing the “right” amount of immigration necessarily means balancing different population groups and making conscious choices about which industries should prioritize higher wages for workers and which should focus on lower prices for end consumers, he said.
Of course, immigrants are not only workers, but also “people with lives and families,” Terrazas said. “Immigrants are also consumers; they have children and families, they go to school, they use roads, parks and recreational facilities.”
Consumer demand is another force that drives the economy forward, creating demand for goods and services. And immigrants tend to start businesses at higher rates than native-born Americans, including businesses that then hire other people. Krugman illustrated this with an example from his childhood home in Utica, where a Bosnian refugee founded the now thriving Chobani yogurt company. (“It’s actually Bosnian yogurt,” Krugman joked.)
“It turns out that the dynamism and vitality of the U.S. economy has a lot to do with the influx of immigrants,” he said.
None of this means we should advocate for fully open borders, Krugman was at pains to point out. But it suggests the U.S. economy has a long way to go before labor supply becomes too much to handle.
As Apollo chief economist Thorsten Slok recently wrote, the U.S. indigenous workforce still has about 5 million “missing workers,” including people who died during the pandemic as well as missing growth in its aftermath.
“These 5 million missing workers are why the labor market is tight and why wage inflation is likely to remain high,” Slok wrote. “In other words, there is still plenty of room for job growth.”