How immigration helps the U.S. economy by driving job growth

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Asurge in immigration last year helps explain the economy's striking resilience — and if sustained, could allow the job market to keep booming without stoking inflation in the years ahead.

Why it matters: Immigration policy is deeply politically contentious, but there is a strong consensus among economic policymakers that the immigration increase is a key part of the labor supply surge that helped bring down price pressures last year even amid the economy's robust growth.

State of play: New analysis from the Brookings Institution puts some hard numbers on the relationship between the rise in immigration and the labor market — finding an influx of workers is allowing the U.S. to sustain higher rates of payroll gains than forecasters thought it could before the pandemic.

• "Faster population and labor force growth has meant that employment could grow more quickly than previously believed without adding to inflationary pressures," economists Wendy Edelberg and Tara Watson write for the Hamilton Project.

By the numbers: Before the pandemic, forecasters estimated sustainable monthly employment growth would be between 60,000 and 130,000 in 2023 — a key reason why last year's monthly average of 255,000 looked way too hot.

• But Edelberg and Watson say that, accounting for higher immigration, the economy could have accommodated job growth between 160,000 and 230,000 in 2023 "without adding to pressure in the labor market that pushed up wages and price inflation."

Related video: Why the U.S. can't solve immigration (CNBC)

• The authors estimate that, if immigration continues at the current rate, "employment growth of nearly 200,000 workers a month is consistent with a healthy, but not too hot, labor market" — roughly double what forecasters thought to be the case before the pickup in immigration.

What they're saying: "It seemed rather surprising to me that we could be so close to the inflation target, and employment growth would still be well above the pace I thought was consistent with a sustainable labor market," Edelberg, a former Congressional Budget Office chief economist, tells Axios.

• "What this tells me is monetary policy does not have to do as much as I thought to slow the labor market," Edelberg adds.

How it works: The research uses immigration estimates from the CBO that suggest faster population and labor force growth in recent years not fully captured by the Labor Department (which uses Census population estimates).

The big picture: The authors estimate the immigration surge didn't just jolt the labor force — but also is at least a small factor behind resilient consumer spending and GDP growth.

• Immigration pushed up real consumer spending growth by about 0.2 percentage point last year — with a similar boost expected this year, the authors estimate.
• Economic activity directly attributable to the increase in immigration also increased real GDP by 0.1 percentage point per year since 2022.

Yes, but: The authors also note that immigration growth also heightened demand for housing — and may have put "upward pressure on rents in some areas."

Data: The Brookings Institution via Congressional Budget Office; Graphic: Rahul Mukherjee/Axios

The effects of the immigration surge may still be playing out.

• "The authorization process [for undocumented immigrants] means that labor force participation of new immigrants could be hump-shaped over several years, pointing to some of the effects of 2023 immigration still being in the pipeline," Evercore ISI vice chair Krishna Guha wrote in a note this week.

What they're saying: On Capitol Hill last week, Fed chair Jerome Powell acknowledged the math of the situation while trying to avoid being drawn into the deeply political questions around immigration policy.

• "It's just arithmetic," Powell told the House Financial Services Committee. "If you add a couple million people to an economy, a percentage of them work, there will be more output."
• "I'm just reporting the facts there," he added. "I'm not going to say anything is needed for the future or good policy indirectly or directly. I think it's just reporting the facts to say that immigration and labor force participation both contributed to the very strong economic output growth that we had last year."

Between the lines: Don't expect the Biden administration to tout immigration-driven job growth on the campaign trail, as our colleague Hans Nichols reports. Beyond the politics, there are some policy challenges generated by elevated immigration rates.

• "Our analysis shows they have been really positive for the overall economy and, frankly, really positive for the federal budget" but that some of the influx has put pressure on state resources, Edelberg says. "But these immigration flows have not been the result of optimal, well-thought out policy."
• If that's the case, "communities that have been growing like gangbusters because of really strong immigration will see that growth come to a stop. Those sorts of abrupt starts and stops for local economies can be painful."

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