Shortage of foreign-born workers will constrain workforce growth even after participation makes a full recovery.
A dramatic slowdown in immigration over the past few years is exacerbating the U.S. worker shortage, contributing to wage pressures and likely constraining growth for some time, Federal Reserve economists told MNI.
The loss of older workers and women from the workforce during the Covid-19 pandemic have been cited as top reasons for the lack of labor supply. But the decline in immigration is also playing a significant role, and the trend isn't likely to improve soon due to massive backlogs and Fed tightening that may weaken growth prospects, the economists said.
"The lack of immigration inflow in 2020 and 2021 created a shortfall of anywhere from 800,000 to 2 million workers," Dallas Fed economist Pia Orrenius said in an interview. "In a normal year, immigrant workers account for a third to half of the growth in the workforce. So it’s very obvious that the lack of immigration has aggravated labor market tightness, difficulty in hiring and some of the wage inflation we've seen."
U.S. immigration has been declining for several years prior to the pandemic but net flows flatlined at almost zero during 2020 and 2021. Current flows are still a fraction of pre-pandemic trends.
Estimates of how many fewer working-age immigrants there are in the U.S. as a result of the pandemic vary due to high nonresponse rates in Census data. Giovanni Peri, a labor economist at University of California, Davis, estimated using the Labor Department's monthly Current Population Survey that about 2 million foreign-born workers are "missing" today than had the trend over the decade prior to the pandemic continued. Fed Governor Christopher Waller has cited a 1.5 million figure.
"Immigration plays a role that differs by industry, but it's not negligible in the current labor shortage, with so many jobs open right now" San Francisco Fed economist Nicolas Petrosky-Nadeau told MNI.
As the economy recovered and wages rose, many service sector workers quit their low-paid jobs to work in e-commerce, leaving a slew of vacancies in restaurants and hospitality that have typically been filled by immigrants. That dynamic helped drive service sector wages higher, Orrenius said.
Record numbers of undocumented migrants, attracted by the wage hikes, have flooded in to take those jobs, but political opposition to President Joe Biden's handling of illegal border crossings has also sapped momentum on legal immigration reform.
The U.S. Citizenship and Immigration Services said in March it was reviewing more than 9.5 million pending applications, a 66% increase from the end of fiscal year 2019.
"It’ll continue to be a challenge even with an administration that’s more accepting of immigrants, especially of asylum seekers and refugees, we still have a lot of barriers to the immigration system because of its archaic nature, backlogs and staffing shortages at USCIS," Orrenius said.
CYCLICAL BOOST TO END
The Fed is hoping to ease the demand-supply imbalance in the labor market by tightening financial conditions, and that means the cyclical boost to labor force participation could run out by the end of the year. Add to that the retirement of baby boomers and an aging population, immigration plays an even larger role in workforce growth going forward.
The University of Texas at Austin professor Aysegul Sahin, who also advises several regional Fed banks, said participation lags improvements in the unemployment rate by about nine months on average, which means it could top out at 62.5% to 63% by year-end, close to its 2019 average. The rate was 62.3% in May, according to jobs figures released Friday that slowed a moderation of job growth to a still unusually strong 390,000 for the month.
"Generally, participation rises late in the cycle if labor demand is strong and continued. Anything that serves to dampen labor demand should slow down the process of people staying in the labor force," Petrosky-Nadeau said.
A recovery in immigration "would make a sizeable contribution to alleviating the pressures."