Economists Say Increasing Immigration Will Reduce Inflation

Economists say that one of the best ways to reduce inflation is to increase immigration, which can be done through expanding legal channels for temporary workers and admitting more family and employment-based immigrants. If polls are correct, that should be fine with Americans. Sixteen percent of registered voters labeled “inflation/cost of living” the most important issue facing the country today, according to a recent Fox News poll, compared to 5% who considered “immigration/border security” the country’s top issue. Also, research shows that increased legal admissions can reduce illegal entry.

That a lack of immigrants can contribute to inflation and harm Americans by reducing their purchasing power is not a new topic for economists. “The net effect of immigration on natives’ purchasing power . . . depends not only on wage but also on price effects,” according to research in 2008 by economist Patricia Cortes (Boston University).

Cortes used confidential microdata from the Consumer Price Index and estimated the impact of low-skilled immigration on consumer prices. “I find that, at current immigration levels, a 10 percent increase in the share of low‐skilled immigrants in the labor force decreases the price of immigrant‐intensive services, such as housekeeping and gardening, by 2 percent,” writes Cortes.

She found wage impacts mostly fell on other immigrants. “Low-skilled natives and low-skilled immigrants are far from being perfect substitutes [in production] . . . therefore, a low-skilled immigration shock should affect mostly the wages of other low-skilled immigrants and have little effect on the wages of low-skilled natives.” Cortes found to the extent that there were adverse wage effects, they fell on “the wages of native Hispanics with low English proficiency than on the wages of other low-skilled native groups.”

The situation America found itself in after Trump administration policies and the Covid-19 pandemic was not an immigration “shock” but a significant decline in admissions.

In a November 30, 2022, speech at the Brookings Institution, Jerome Powell said, “In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.” said Powell. “Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market.”

Powell named “excess retirements” a factor contributing to the labor shortfall. “The second factor contributing to the labor supply shortfall is slower growth in the working-age population,” he said. “The combination of a plunge in net immigration and a surge in deaths during the pandemic probably accounts for about 1-1/2 million missing workers.”

A footnote in the speech (highlighted by Washington Post columnist Catherine Rampell) dealt with Donald Trump’s immigration policies. “Due, at least in part, to pandemic-related restrictions on entry into the United States, total immigration has slowed substantially since the start of the pandemic, lowering the labor force by about 1 million people relative to pre-pandemic trends,” according to the footnote. “While lawful, nonpermanent immigration (for example, H-1B and H-2B visa holders) has bounced back considerably since earlier in the pandemic, these categories of immigration are generally still below 2019 levels. Meanwhile, lawful permanent immigration (that is, new green card holders) is also somewhat lower than in 2019 and well below levels that prevailed earlier in the 2010s.”

Economists Giovanni Peri and Reem Zaiour estimated that due to the pandemic and U.S. immigration policies under the Trump administration, there were 2 million fewer working-age immigrants.

“Inflation occurs when the demand for goods and services grows faster than supply,” said Mark Regets, a labor economist and a senior fellow at the National Foundation for American Policy. “Increasing our ability to produce by increasing the supply of labor is the least painful way to control inflation.”

Opponents of immigration generally argue that labor shortages are inherently good, a belief economists would attribute to a lack of understanding of economics, particularly the concept of real wages and the interests of individuals as consumers.

“Real income, also known as real wage, is how much money an individual or entity makes after adjusting for inflation,” according to the definition provided by Investopedia. In addition to other negative impacts, such as less economic growth, an insufficient number of workers can lead to inflation. When real wages are lower, workers cannot buy as much with their earnings.

A recent study explored how inflation, immigration and real wages are connected. “To achieve higher real wages while reducing inflation and encouraging employment, the U.S. must either increase labor force participation and expand training or increase the pool of workers available through the admission of foreign workers,” according to professors Justin Gest (George Mason University) and R. Andrew Butters (Indiana University) in research for FWD.us. “The only other remedy is for a recession to cool demand and reduce the pressure to hire—a resolution few will favor.”

“It’s well-established that immigrants fill labor shortages, promote economic growth and stimulate entrepreneurship and innovation,” wrote Gest in the Wall Street Journal. “Our discovery of the link between migration and inflation highlights the way that immigrants also help labor markets be more responsive to local changes in demand and supply. The pandemic gave the Trump administration the opportunity to experiment with a zero-immigration future. It didn’t go well for anyone.”