Immigration and Economic Growth

Our elected officials in Washington DC continue to struggle over the issue of immigration policy reform. The Trump administration has already made its views known, with its Muslim Ban, mixed signals on the DACA (Deferred Action for Childhood Arrivals) program, and more recently, its immigration reform proposal, a plan that reflects a much more restrictive stance toward immigrants than previous administrations. Based on comments made by members of the administration, there are national security, as well as job protection, motives behind its approach to this significant public policy issue.

Let’s set aside the national security issue for a moment and focus on the economic ramifications of a more restrictive immigration policy. The bottom line is this: With the economy at full employment for several quarters in a row, it is highly unlikely that immigrants are displacing American citizens in jobs, and in fact, a more restrictive immigration policy will prevent the U.S. economy from reaching its growth potential in the future. That’s because we are not “home-growing” enough workers to meet our economy’s increasing demand for labor.

Here are some facts. As of late 2016, the U.S. labor market was effectively at full employment, with the nation’s unemployment rate dropping to the mid-4% range for the first time since 2000. The labor force growth rate more than doubled from 0.3% in 2014 to 0.8% in 2015, then accelerated to 1.3% in 2016, only to pull back last year to 0.7%. In fact, the growth rate of the labor force has slowed noticeably in the last several years, with the growth rate below the long run average of 0.9% every year beginning in 2008, with the exception of a spurt in 2016.

At the same time, the number of job openings has hit a string of record highs, as businesses around the country have posted “Help Wanted” signs, on “Main Street” storefronts and online. Moreover, the job openings have shown up in nearly every American industry from high tech to construction to restaurants, and just about everything in between.

What’s happening with America’s labor force? For one thing, members of the boomer generation, the mainstay of the labor force over the last few decades, are retiring in growing numbers, a trend that will continue into the next two decades. That said, they aren’t following their forbears in lockstep fashion. Rather, they are actually staying in the labor force in greater numbers beyond the traditional retirement age window as reflected in a trend increase in the labor force participation rate (LFPR) among those over 65. Similarly, the LFPR of individuals of prime working age, between 25 and 54, has edged up over time.

However, the newest members of the labor force are showing up in numbers, but have shown a long-term decline in their LFPR. In other words, on average, younger individuals (16 to 24 years of age) are entering the labor force and taking on jobs at a later age than their parents and previous generations. The reasons for this are not entirely clear. Many of these individuals are attending school to a greater degree than in the past, but a sizable number are disconnected from the labor market altogether. Regardless, this means that the pipeline of workers is not filling up as fast as it once did.

There are a few ways to increase the labor force so businesses can fill their open positions. One would be to encourage increased labor force participation among younger individuals, even as they pursue their schooling.

A second approach is to have more babies. In time, they will grow up to become adults and hopefully will become productive members of the labor force. The problem is that birth rates in the U.S. have been decreasing. As of 2015, the average birth rate in the nation was 1.84 births per woman, down from 2.06 in 2000 and 1.93 in 2010 – and about half of the 1960 rate (3.65). Oh, and it takes about 18 years to get to the point where this “process” begins to add to the labor force pipeline.

Another approach is to fill the void with immigrants, something that has been a continual part of the American experience. There were 41.5 million foreign-born individuals in the working U.S. population in 2017, comprising 16.3% of the nation’s labor force. That’s up from 2007 when it was 15.1%, despite the fact that immigration to the U.S. has dropped off in the last two years.

Significantly, the number of foreign-born workers has been growing faster than home-grown workers, averaging growth of 2.1% per year between 2006 and 2017 compared to 0.8% for U.S.-born workers. Had this not been the case, U.S. labor force growth would have slowed to a trickle as early as 2014.

In the end, if the Trump administration wants to move the economy to another level of growth on a sustained basis, it will need to do more than just cut taxes and stimulate investment expenditures. In the absence of dramatic gains in labor productivity (labor’s contribution to economic growth has been notably weak in the period since 2000 compared to the period before), it must increase the labor force, and a rational immigration policy – one that will allow workers of all skill levels to legally enter the U.S. as workers, maybe even business owners and entrepreneurs—must be a part of the solution.

And the notion of establishing a merit-based system that prioritizes immigration of skilled workers will leave a lot of industries that rely on foreign workers out in the cold. Yes, foreign workers are certainly found in the tech sector, but they also work at construction sites, wash dishes at restaurants, clean hotel rooms (and homes), and serve as care givers in hospitals, nursing facilities, and private homes. With the economy at full employment, there few workers to fill these positions. Unemployment rates are low across the board, even for unskilled work.

Foreign workers are a part of this nation’s economy, not just in border states but throughout the country, and we need them more today than ever before.