Inflation has been a major concern for many Americans, even as recent reports show that prices are starting to cool off. The Federal Reserve (often called “the Fed”) has been working hard to control inflation without causing a recession, but there’s a simple solution they might be overlooking: increasing immigration.
The Labor Shortage and Its Impact on Inflation
In the past year, businesses across the U.S. have struggled with labor shortages. As of July, there were 10.7 million job openings in the country, while only about 5.7 million Americans were unemployed. This creates a big gap—about two jobs for every worker. Even if every unemployed person found a job today, there would still be 5 million open positions.
Goldman Sachs estimated that to bring inflation down to the Federal Reserve’s target of 2%, the number of open jobs would need to decrease by about 2.5 million. The Fed’s solution so far has been to raise interest rates, which works by slowing down wage growth and discouraging business expansion. But this also reduces the number of new jobs and can lead to a slowdown in the overall economy.
There are many reasons for the labor shortage: the “Great Resignation” (where many people left their jobs during the pandemic), the closure of schools, the collapse of childcare and elder care industries, and the long-term effects of COVID-19. Over one million Americans died from COVID, and 25% of them were of working age. But one key reason for the shortage could be solved: the lack of immigrant workers.
The Pandemic’s Impact on Immigration
From March 2020 to July 2021, the U.S. government issued about 1.2 million fewer visas to adult immigrants, refugees, and temporary foreign workers compared to pre-pandemic levels. By the end of 2021, the U.S. had about 2 million fewer working-age immigrants than it would have had if immigration patterns had remained the same.
Industries that relied more heavily on immigrant workers in 2019 experienced significantly higher rates of job vacancies in 2021. For example, industries with 10% more immigrant workers than others in 2019 had a 3% higher rate of unfilled jobs the following year.
The Critical Role of Immigrants in U.S. Agriculture
Immigrant workers play a vital role in many sectors, particularly agriculture. In fact, 73% of the agricultural workforce in the U.S. is foreign-born, while immigrants make up less than 14% of the country’s total population. This over-representation of immigrants in farming is due to decades of fewer Americans entering or staying in agricultural work.
For example, between 2002 and 2014, the number of full-time farm workers in the U.S. dropped by nearly 22%. As a result, farmers across the country have struggled to hire enough workers to harvest crops. In California, millions of dollars worth of crops, like strawberries and broccoli, were left unharvested in 2017 due to a lack of workers. Similarly, in 2020, Florida’s watermelon harvest went to waste because workers were delayed at the U.S.-Mexico border. In Wisconsin, 30,000 full-time farm jobs were open in July 2022 alone.
The Importance of Immigrant Workers in the Farm Workforce
As labor shortages worsened, the U.S. agricultural industry became more reliant on immigrant workers, including those hired through the H-2A visa program. This program allows farmers to bring in foreign workers temporarily if they can’t find enough U.S. workers. Between 2015 and 2020, the number of H-2A applications increased by 87%, with 256,000 H-2A workers hired in 2019.
However, the H-2A visa only permits workers to stay for seasonal work, typically up to ten months. This doesn’t meet the needs of many farmers, especially those in industries like dairy and livestock farming, where workers are needed year-round. As a result, 47% of farmers report being unhappy with the program, citing that it’s time-consuming, expensive, and doesn’t meet their staffing needs.
A recent study by Texas A&M University found that increasing the number of immigrant farm workers could lower food prices and raise wages in the agricultural sector. Despite this, the U.S. Department of Labor (DOL) has proposed new rules that would make it harder for farmers to hire these workers, adding additional paperwork and delaying the process by several months.
The Cost of Labor Shortages and Delays
The delays and complications farmers face when hiring workers through the H-2A program only drive up the cost of food, contributing to rising grocery prices and inflation. At the same time, the gap between available workers and unfilled jobs remains wide, which also fuels inflation.
A Solution: The Farm Workforce Modernization Act
Instead of making it harder for farmers to hire workers, the Biden administration should support the Farm Workforce Modernization Act (FWMA), which is currently under negotiation in the Senate. This bill, which has already been passed twice in the House of Representatives, would allow farmers to hire H-2A workers year-round instead of just for seasonal work. It would also create a pathway to legal status for some farm workers, which is not available under the current system.
The FWMA would modernize the agricultural workforce system in the U.S., making it easier for farmers to find workers and reducing the inflationary pressures caused by labor shortages.
The Role of Immigrants in Lowering Inflation
With nearly two open jobs for every available worker, immigrants would not be taking jobs away from Americans. Instead, they would be filling crucial positions across many industries, including agriculture. Allowing immigrants to fill these gaps—both in farming and other sectors—would help reduce food prices, ease labor shortages, and slow down inflation.
How do low-skilled immigrants affect local economies
Low-skilled immigrants significantly influence local economies in various ways, affecting labor markets, business dynamics, and public finances. Understanding these impacts is essential for policymakers and communities as they navigate the complexities of immigration.
Labor Market Dynamics
- Increased Labor Supply: Low-skilled immigrants contribute to the labor supply, particularly in sectors that require manual labor or low educational qualifications, such as agriculture, construction, and hospitality. Their presence can help fill labor shortages, allowing businesses to operate efficiently and expand.
- Wage Effects: The influx of low-skilled immigrants can lead to downward pressure on wages for low-skilled native workers. Studies indicate that a significant increase in low-skilled immigration can reduce wages for native workers competing for similar jobs. For instance, research shows that a 10% increase in low-skilled immigrants can decrease the wages of native workers with similar skill levels by approximately 0.5% to 1%.
- Youth Employment: The employment rates of native youth may also be affected by low-skilled immigration. Young workers often compete for entry-level positions that are also sought after by low-skilled immigrants. Some studies suggest that increased immigration can lead to reduced employment opportunities for native teens, as they are more likely to occupy jobs typically held by less-educated adults.
Business Impact
- Profitability for Firms: Low-skilled immigrants can enhance profitability for businesses that rely heavily on unskilled labor. An increase in the local supply of low-skilled workers can reduce labor costs, allowing firms to increase their profit margins. Research indicates that a rise in low-skilled immigrant workers can lead to an increase in profits for small and medium-sized enterprises that depend on lower-wage labor.
- Innovation and Productivity: While low-skilled immigration may initially lower wages, it can also lead to long-term productivity gains. Increased diversity within the workforce can stimulate innovation and introduce new ideas, benefiting firms in the long run. Additionally, businesses may adapt by investing in technology or training to improve efficiency.
- Sectoral Shifts: Low-skilled immigrants often gravitate toward specific industries, which can lead to sectoral shifts within local economies. For example, areas with high concentrations of agricultural work may see an increase in agricultural output due to the availability of immigrant labor.
Fiscal Implications
- Indirect Fiscal Benefits: Contrary to some perceptions of low-skilled immigrants as a fiscal burden, they can generate indirect fiscal benefits through their contributions to the economy. Estimates suggest that each low-skilled immigrant may provide an indirect fiscal benefit of approximately $750 annually due to their role in supporting local businesses and contributing to tax revenues3.
- Public Services Demand: However, it is essential to consider the demand for public services that may arise from increased immigration. Low-skilled immigrants often require access to services such as education and healthcare, which can strain local resources if not managed effectively.
Challenges and Considerations
- Integration and Community Impact: The integration of low-skilled immigrants into local communities poses challenges. Effective policies are necessary to ensure that immigrants can contribute positively without overwhelming local systems or creating tensions within communities.
- Long-Term Economic Growth: While low-skilled immigration can provide immediate economic benefits, there is ongoing debate about its long-term impact on economic growth and productivity. Policymakers must balance the need for labor with considerations about skill development and workforce training for both immigrants and native workers.
What are the long-term economic effects of immigration on the U.S
The long-term economic effects of immigration on the United States have been a subject of extensive research and debate. Most economists agree that immigration generally has a positive impact on the U.S. economy, influencing various aspects such as labor force growth, tax revenue, consumer demand, and innovation.
Labor Force and Economic Growth
Immigrants make up a significant portion of the U.S. labor force, with approximately 31 million immigrants working in the country as of 2023, constituting nearly 19% of the civilian workforce1. This influx contributes to economic growth by increasing the size of the labor force, which in turn boosts productivity and overall economic output. In 2022 alone, immigrants generated about $1.6 trillion in economic activity and contributed over $579 billion in taxes at various government levels.
Impact on Wages and Employment
While there are concerns regarding immigration’s effects on wages, especially for low-skilled workers, research indicates that these effects are often minimal and short-term. The National Academies of Sciences found that while immigration can exert downward pressure on wages for some groups, particularly prior immigrants or low-skilled native workers, the overall long-term impact on average wages is negligible. In fact, studies suggest that immigration may lead to higher wages for native workers by pushing them into more specialized and higher-paying jobs.
Innovation and Productivity
Immigration has been linked to increased innovation and productivity. Research indicates that areas with higher immigrant populations experience a rise in patent filings, which is a proxy for innovation. The presence of immigrants fosters a more dynamic economy by introducing new ideas and businesses, contributing to an estimated 5% increase in wages since 1965 due to enhanced economic growth from immigration.
Fiscal Impact
The fiscal impact of immigration varies across different government levels. While immigrants tend to contribute positively to federal budgets due to their tax payments during their working years, they can impose costs on state and local budgets, particularly through public services like education. Overall, the net fiscal impact is generally positive at the federal level but may be negative at state and local levels due to differing expenditure responsibilities.
By embracing immigration as a tool to strengthen the economy, the U.S. can address both the labor shortage and inflation at the same time, benefiting workers, consumers, and businesses alike.
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