Why Immigration Has Boosted Job Gains and the Economy

The strength of the US economy continues to surprise. Even after the Federal Reserve raised interest rates at an unprecedented pace to bring down runaway inflation, consumers have kept spending, the labor market has remained strong, and a long-expected recession has failed to materialize.

Economists now attribute some of that strength to an increase in immigration in the wake of the covid-19 pandemic, which they say helped insulate the economy from the effects of inflation by dampening wage gains and propping up consumer spending.

Under typical circumstances, economists say immigration’s effects on production and consumption tend to balance each other, meaning there isn’t a major net impact on the economy. But because workers were in such short supply in 2022, the surge in immigration helped rebalance the labor market and keep wage pressures (and therefore inflation) in check.

An analysis by Goldman Sachs concluded that the rebound in immigration helped reduce wage growth by three-tenths of a percentage point overall, and at least double that in the leisure and hospitality sectors. At the same time, Brookings Institution researchers have estimated that immigration raised consumer spending—an important driver of economic growth—by roughly 0.1 percentage points in 2022 and 0.2 percentage points in 2023. They expect another 0.2-point boost this year.

Surging Immigration

The Congressional Budget Office estimates that net immigration in 2023 was 3.3 million, more than triple what was expected in 2019. Foreign-born workers made up over 19% of the labor force—an all-time high—in February, according to the Bureau of Labor Statistics.

Even Fed Chair Jerome Powell has acknowledged the impact. “We’ve had what amounts to a significant increase in the potential output of the economy that’s not about productivity,” he said after the central bank’s policy meeting earlier this month. “It was about having more labor ... in 2022, both through participation and immigration.”

Immigration isn’t slowing down, but with inflation improving and the labor market in better balance, market watchers shouldn’t count on that trend to have the same dramatic impact on the economy in the months ahead. Here’s what investors need to know.

How Does Immigration Impact the Economy?

New immigrants put pressure on both consumption and production. More immigrants mean more people buying goods and services, which is generally seen as inflationary. But more immigrants also mean more workers, which helps increase production and is generally seen as deflationary. Traditionally, many economists believe those two forces cancel each other out, according to Goldman Sachs chief US economist David Mericle. But the last few years have been different.

Immigration Helped Dampen Wage Pressures

In 2022, “we probably had the tightest peacetime labor market in history,” Mericle says. The rise in immigrants that year was abnormally large by historical standards, he writes in a recent research note. And it occurred when the labor market was overheated, especially for low-wage workers.

“The surge seems to have been mostly among unauthorized immigrants, who we’ve shown on average enter lower-paying industries and earn less than the average American worker,” Mericle explains. “That probably did matter more than it usually would, because it helped a little bit to resolve an initial situation of supply and demand imbalance that was generating fairly extreme wage pressures at the low end of the distribution.”

In other words, an influx of immigrants at the lower end of the wage spectrum helped keep the labor market in better balance at the lower end of the income spectrum, where the labor market was tightest and workers were difficult to come by.

However, Mericle emphasizes that immigration wasn’t the only factor at play as wage pressures normalized, nor was it the largest. He points to inflation shocks and the reopening of the global economy as bigger culprits. Without the immigration bump, he says, “we wouldn’t have been creating as many jobs because we wouldn’t have had as many people to put to work. GDP growth would have been lower because the workforce would have been growing a bit more slowly. But would wage and price pressures look drastically different? No.”

Immigrants Propped Up US Hiring and Spending

Over the past few months, the economy has added significantly more jobs than it did in the days before the pandemic, fueling concerns that the labor market may be on the verge of overheating.

A recent paper by Wendy Edelberg, director of the Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution, and Tara Watson, director of the Center for Economic Security and Opportunity at Brookings, finds that intensified immigration has actually increased the number of jobs the economy can sustainably accommodate.

“We estimate that the labor market in 2023 could have sustainably accommodated employment growth of 160,000 to 230,000,” they wrote. “That is still below the actual monthly increases in employment in 2023, but far less so than previously estimated.” For 2024, they expect sustainable employment growth to fall between 160,000 and 200,000 jobs per month—double the level projected before the pandemic.

Edelberg and Watson also concluded that immigration helps explain some of the unexpected growth in consumer spending. They acknowledge that the boost—0.1 percentage point in 2022 and 0.2 percentage points in 2023 and 2024—is relatively small compared with overall spending growth over the same periods—1.2% in 2022 and 2.7% in 2023—but add that “the effect helps to explain some of the surprising strength in consumer spending.” They also note that retail sales have risen faster in states with more immigrants.

Will Immigration Continue to Affect the Economy?

With inflation falling and job growth stabilizing, Mericle expects the effects of the immigration surge to fade: “The starting condition is now a much more balanced labor market than it was in 2022. I think we are back to a world where the textbook story that this isn’t a huge deal for wage growth and inflation is probably right again.”

But overall, analysts say the ongoing rise in immigration will still have a modest impact on the economy. For example, the Congressional Budget Office expects high net immigration through 2026 to boost GDP growth by about 0.2 percentage points annually over the next decade. “If immigration trends continue at high levels in 2024 as CBO expects, employment growth and economic activity will likely continue to be affected,” Edelberg and Watson conclude.