How Immigration is Fueling the Surprisingly Strong US Economy

Although many politicians will never want to admit it, the current performance of the US economy is much better than analysts expected. We continue to create jobs at a steady pace. And if inflation remains at an unacceptable level, it has probably started to ebb.

How did we achieve this result? There are undoubtedly multiple reasons for this. But perhaps you’ve never heard of one particular ingredient that goes into the economic sauce: a sudden and healthy rebound in net immigration, which reached a million people in 2022, its highest level since 2017. We don’t know if this rebound will last, but it has been really helpful.

It may be a bit of an exaggeration, but not entirely wrong, to say that immigrants are saving the American economy. On said economy: Despite the sharp rise in interest rates, the labor market remains stubbornly buoyant, with 236,000 jobs created in April.

Not only has employment rebounded with astonishing speed from the recession due to the Covid pandemic, but it is now exceeding projections prior to the health crisis. In its Budget and Economic Outlook 2020 published just before this one, the Congressional Budget Office predicted that the American economy would create two million jobs over the next three years. In fact, we’ve created more than three million.

But in today’s topsy-turvy political environment, good news is sometimes seen as bad news. In order to curb inflation, the Federal Reserve (Fed) tries to slow the economy, perhaps even causing a recession.

No worsened inflation

Consequently, the good employment figures should probably cause concern, as they herald a worsening of inflation. However, this is not what seems to be happening: it would seem that inflation is rather in the process of receding despite the deluge of job creations. How is it possible?

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Let’s take a look at the US economy over the past three years. The story goes like this: Faced with a pandemic that temporarily crippled much of the economy, the federal government responded with huge support programs to help laid-off employees, struggling businesses, and more.

These programs have greatly alleviated what could have turned into severe economic hardship, but they have also maintained or facilitated the public’s ability to purchase goods and services at a time when the ability of the economy to provide those goods and services was restricted by the disruptions linked to the pandemic. This resulted in inflation.

Today, many of these disruptions have been resolved; bottlenecks in supply chains have been largely cleared. And the generous aid programs are gradually fading in the rear view mirror.

Damage to long-term employment?

But until recently, many people argued that the pandemic had caused long-term damage to the productive capacity of the US economy, including reducing the potential supply of labor. For example, last November, Jerome Powell, the chairman of the Fed, gave a speech in which he argued that there were still several million “missing workers” left compared to pre-Covid projections.

The pandemic has directly reduced job supply by killing around 400,000 potential employees; it is possible that the symptoms of the long Covid will prevent an even greater number from working. Powell also explained that the pandemic caused millions of early retirements among older employees who had little chance of returning to work.

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Finally, he insisted on the sharp drop in net immigration. Just a few months later, it appears that many, but not all of Powell’s fears were unfounded. The alleged early retirements are not confirmed by the data: the labor force participation of Americans aged 55 to 64 has fully returned to its pre-Covid level. And immigration has really rebounded.

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Recent immigrants are overwhelmingly adults of working age: according to census data, 79% of foreign-born residents who arrived after 2010 are between 18 and 64 years old, compared to 61% in the total population. This is why the surge in immigration has probably played an important role in the ability of the economy to ensure rapid employment growth, without causing runaway inflation.

2023-05-30 14:00:00

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