Immigration as one tool to fight inflation

You think inflation is making us grumpy now. Just wait until we start running out of chocolate. 

What does inflation have to do with chocolate? 

Imagine that you run a chocolate factory. You need people to make and package the chocolate. When you’re short-staffed, you are producing less chocolate. You have to spend time looking at resumes and in interviews instead of actually making the chocolate. That means less chocolate for you to sell and for the rest of us to enjoy.

No one wants a world with less chocolate.

So what can you do? You could raise wages to attract and keep workers happy. 

But how do you pay for those higher wages? Higher prices for your chocolate? Maybe, but higher prices mean that your sales go down and eventually won’t need those workers at all. 

Raising wages can only take you so far. At some point, it could lead you to close your doors entirely. 

The crux of your problem as a chocolatier is that the US economy is short more than 5 million workers. That’s a problem every business in the country is facing right now. 

Instead of making chocolate—or producing anything else—employers are spending time trying to find the workers they need. This means less product on store shelves. Many employers aren’t doing their own jobs because they are searching for other workers or doing the work that’s not getting done. Sending your accounting team to work on the factory floor is less productive than having them use their number sense to keep your finances in order.

This historic workforce shortfall is making the entire country less productive.

According to the most recent data, there are around 5 million missing workers in the country. In total, the US has about 11 million open positions. But fewer than 6 million people looking for work. That makes for a lot of problems for businesses across the country.

Source: FRED, accessed October 19, 2022.

For policymakers looking at this trade-off, and wondering how they can help, a great option is to let everyone—chocolatiers included—hire from abroad. This might be just what US businesses and consumers need to help power the US economy. And by boosting productivity, it can reduce inflation. 

Given that the US faces a shortfall of workers, a sizable portion of which is a result of less immigration during COVID-19, policymakers should be opening up pathways for more people to work legally in the country. It’s a promising way to support US businesses and mitigate inflation for the good of the entire country. 

As my colleague, Mia Love will testify today before the Senate Committee on the Judiciary’s subcommittee on Immigration, Citizenship, and Border Safety, “Opening more avenues for immigrant workers will help tame inflation and encourage economic growth.”

It’s hard out there—in a historic way

Today’s mismatch between the economy’s need for workers and the number of people looking for work is simply unprecedented. There are about two open positions for every unemployed person in the country. Since the Bureau of Labor Statistics started tracking job openings in 2000, it has never been like this

You’re probably seeing the same signs around your town that are practically everywhere in the country: “Reduced hours;” “No deli open today.” Some fast food shops are offering $500 bonuses for workers that stay 90 days. People with rare skills or qualifications—like forklift drivers—can claim $2,000 signing bonuses!

All of these signs mark a business fighting hard to find workers. It’s not just a one-time thing. These one-time bonuses are usually paired with higher wages. The Atlanta Federal Reserve Bank’s wage growth tracker shows a big spike since May of 2021. Of course, a large portion of that wage increase seems to be eaten up by inflation.

Immigration was cut during COVID, so there is ground to make up

COVID-19 regulations have reduced the number of migrant workers coming to the country for two years. 

In total, Madeline Zavodny, an immigration economist, estimates about 630,000 fewer migrant workers came to the US because of COVID-19 restrictions. Giovanni Peri, another economist, estimates about 2 million missing workers. These numbers make an easy case for admitting at least that shortfall today.

Take a second and imagine that the US adopted open borders. That means anyone who wanted to live and work in the US would be free to do so. You may have seen stories of record border crossings—1.3 million encounters at the border.1 The official number is 1.9, but this is an overcount of actual immigrants since about a third of those were repeat crossers. So the actual count of unique crossers would have been closer to 1.3 million.

Imagine that all of those 1.3 million encounters at the border had instead turned into productive workers. Even in this fanciful and politically unfeasible daydream, the US would still be around 4 million people short. 

The US doesn’t need wide-open borders to fix the labor shortage. Instead, policymakers can simply open up more legal work opportunities for migrants. This would have two advantages over today. First, it meets the needs of US businesses. Second, research shows that past expansions of legal work options reduced unauthorized flows. 

Letting employers recruit more workers from outside of the country puts up guardrails for steering migration toward legal pathways.

Granting legal status increases US productivity

Another opportunity for policymakers is to make immigrants already in the country more productive. Economic research shows that we can make workers more productive by giving them legal work status. 

This productivity boost happens because workers with legal status can come out of the shadows. They find better fits for their skills and move towards areas where demand for workers is strong. 

Go back to the chocolatier example—more workers means more time making chocolate and less time looking for workers. It means more time doing the skilled work of making the chocolate and less time putting it into boxes, shipping it, or interviewing. All of that is increased productivity. 

There’s a long history of research suggesting that legalization programs improve productivity. The CGO recently published a study showing that past expansions of legal work status improved productivity. Manufacturing firms, which employ a lot of immigrants, increased their productivity per worker. Manufacturing is a major portion of the US economy. Making this sector more productive makes all of us better off. 

Labour Economics published a similar study. The researchers show that granting legal status to undocumented workers would make the entire economy more productive. They estimate that at least an additional $202 billion of economic output would enrich the lives of Americans each year if undocumented workers were granted a form of legal status. That’s about $600 per person.

Grants of legal status are good for many reasons, not just because they improve productivity. Legal work options and pathways to legal status can play a part in deterring future illegal crossings and can protect vulnerable populations. 

Today, however, it would leave us in the same overall position—5 million workers short. To grow the economy more, we will need more workers, plain and simple.

Immigration can help us move away from inflation

Inflation can feel like an ambiguous problem. There are often so many contributing factors that it’s hard to pin down a specific cause. 

Our current inflation woes are not only because wages are rising to attract scarce workers—though that’s part of the story. The rest of the story is all the measures taken in response to COVID-19 that increased the money supply. 

As economists with the Federal Reserve Bank wrote on March 28, 2022, those measures likely raised inflation by 3 percentage points. Relative to peer countries, the US took an aggressive approach in response to COVID-19 aid. Only time will tell the total effects of the US response. But today it appears the inflation that we’re feeling is tied to that aid increasing disposable income without also increasing the goods available to buy. 

Economies can become like butter over too much bread. That’s our economic story right now. Lots of cash in the system, but not enough to buy or sell with that money. With money in your pocket, but only a limited supply of goods, the result is inflation. 

Although immigration isn’t a cure-all for inflation, it is a tangible way to move the needle in the right direction.

The path to mass consumption is mass production. Bringing inflation down and keeping our pantries full will require producing more goods. An economy that is short 5 million workers is not going to be as productive as one in which employers can find the workers to power their businesses. And that’s where immigration comes in.

We don’t have to be short 5 million workers

Few countries have this advantage of a “jobs magnet” that pulls in the workers that US businesses need. If we want to continue powering the US economy, we should open the door to more of them.

As always, the US should count its lucky stars that a labor shortfall is the problem that it faces. In much of the world, countries have the worse and opposite problem: not enough jobs for too many workers.

Opening the gates to more immigrants is a common proposal when facing inflation and when facing shortages of workers. It’s a promising proposal, though it has its limits. We also need policymakers to rein in the spending that contributes to inflation—which may mean more rate hikes. 

Our COVID-19-caused immigration shortfall means a slower and smaller economy overall. It doesn’t have to be this way. Policymakers should create policies that give employers more opportunities to bring in the workers that they need. 

Doing so will make the entire country better off. 

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.