The Fed’s surprise ally in the fight against inflation

Millions of people — predominantly foreign-born — have joined the workforce to help fill the number of job openings far exceeding available workers.

If President Joe Biden avoids a recession before the 2024 election, one segment of the population will be a key reason why: immigrants.

A spike in legal immigration in the past two years has helped meet surging demand for workers in the wake of the pandemic. The rush of new arrivals to the workforce is a result of the Biden administration working through Covid-era backlogs, along with increased participation in the labor force by foreign-born people already in the country. That, in turn, is boosting the Federal Reserve’s hopes that inflation can cool without a big jump in unemployment.

As Fed policymakers meet this week in Washington, the strength of the job market is among the dynamics they’ll be watching most closely. Central bank Chair Jerome Powell has voiced concern about a market that is “out of balance,” with the number of openings far exceeding available workers. That’s pushing up wages and could feed further price increases, potentially leading the Fed to crank up interest rates even more from two-decade highs to slow the economy.

But so far, another trend has taken hold: Millions of people — predominantly foreign-born — have joined the workforce to help fill many of those jobs.

“The labor market has started to loosen up, without having to reduce demand [for workers],” said Alec Phillips, chief U.S. political economist at Goldman Sachs, which has lowered its odds of a recession in the next year to just 15 percent. “And there’s clearly been a disproportionate contribution from immigrants.”

There’s no guarantee it will last. Even without further Fed efforts to slow demand for goods and services, it’s unclear how long the labor market will continue to hold up in the face of punishingly high rates, which will weigh on both businesses and households. And job vacancies are still unusually high, with about one and a half openings for every unemployed worker.

The short-term anti-inflationary benefit from more workers adds greater urgency to the political battle over how many foreign nationals should be allowed into the country, with many Republicans calling for stricter limits. The issue continues to be a hot-button political topic on the campaign trail, as Washington remains deadlocked over a broader policy in this arena.

Some Republican lawmakers argue that there should be more focus on bringing in immigrants who fill specific needs in the economy, particularly people with higher levels of education.

“President Biden’s immigration policies have forced the poorest Americans to compete against a flood of unskilled foreign labor, stunting wages for working Americans still struggling to buy basic goods in an inflation economy,” Sen. Tom Cotton (R-Ark.) said in a statement to POLITICO. “Immigration policies should support American workers, not replace them with foreigners.”

Nearly three-quarters of the increase in the supply of workers over the last two years has consisted of foreign-born people, according to Courtney Shupert, an economist at research firm MacroPolicy Perspectives.

In a research note, Goldman Sachs economists said green card and work visas had risen by roughly 115,000 and 230,000, respectively, over the past 12 months, “reaching the highest level in years.” They said that would mean 40,000 more workers per month than expected, adding up to about half a million over the next three quarters. That’s spread across a range of sectors and skill levels.

The overall impact on inflation and wages is not totally clear-cut, however, since more immigration also means more consumers who also want to buy goods and services. To help the Fed’s battle against inflation, there needs to be enough new workers to actually boost the overall labor force participation rate.

“People often tend to think of labor markets as having a fixed number of jobs, like musical chairs,” said Brian Kovak, a professor at Carnegie Mellon University. “That is not a good model of the labor market because when there are more people, those people demand goods and services, and those goods and services are produced by workers.”

Negative wage effects also tend to be biggest for people with skills most similar to immigrants, often other foreign-born workers who arrived in the country earlier, he added.

In the meantime, the low unemployment rate and rising wages have helped bring a range of workers into the job market, including women with young children, but also 4 million more foreign-born people over the past two years, according to Kovak.

That pace of growth in the labor force isn’t expected to last forever, though, which has led some senior Fed officials to underscore that the central bank still has more work to do to slow demand for goods and services in the economy.

To achieve a so-called soft landing, where economic growth slows but doesn’t dip negative, demand for workers would ideally fall alongside any slowdown in additional labor supply, such that there still isn’t a big jump in joblessness.

One big question is why foreign-born people have been such an outsized contributor to labor force participation; after all, immigrants are only about 18 percent of the workforce.

One answer might be that the immigrant population dropped significantly during Covid, when movement across borders all but dried up. So sectors with a disproportionate share of foreign-born workers might have been more likely to see shortages and therefore significant jumps in wages as companies competed for a smaller pool of workers.

Indeed, that population hasn’t yet fully recovered, said Wendy Edelberg, a former chief economist at the Congressional Budget Office who’s now a senior fellow at the Brookings Institution.

“The population of immigrants is smaller, but the smaller population is working at a higher rate, so we are doing well on the number of immigrants working,” she said. “This isn’t to say, we can all just say, ‘Mission accomplished, and we’ve made up for Covid.’ It’s more like, ‘Wow, think of the counterfactual if immigration were back up to trend.'”

Jennie Murray, president of the National Immigration Forum, pointed to a variety of bureaucratic moves that have also boosted immigration, such as expanding special visas for U.S. allies in Afghanistan, allowing Indian immigrants to stay in the country when applying to renew their H1-B visas, more refugees, and expanded asylum for people from certain Central American countries.

But she said the pace needs to be faster.

“Before Covid, we needed to add many more workers to the system,” she said. “With our declining population growth and then this restriction on legal immigration, we’re now far behind that.”

Nick Niedzwiadek contributed to this report.