Expanded legal immigration is the ultimate supply side reform

In an inflationary economy, everyone benefits from more workers

Right now, a lot of people have a lot of money and want to buy a lot of stuff, which is good. But this is outstripping the economy’s productive potential, which is not good. And hectoring employers about paying higher wages is not a great solution when prices are rising at an undesirably high rate. That’s in part because inflation is itself undesirable and in part because the Fed is bound to raise interest rates sooner rather than later. More inflation simply means demand needs to be cut off sooner.

In other words, it’s the perfect time to reconsider the basic reality that tons of people would like to move to the United States to work here. The last two big debates about comprehensive immigration reform (in 2007 and 2013) were unfortunately very weak times for the American labor market. But that’s not the situation today.

So while Americans understandably worry about uncontrolled flows of asylum-seekers arriving at the southern border, we ought to be taking advantage of the widespread desire to move to the United States by creating more pathways for legal immigration.

Supply and demand shocks

Neither whiny employers nor the “just pay more!” crowd on Twitter does a very good job distinguishing between robust labor demand and curtailed labor supply, but the economic implications are fairly different.

In a high-demand situation, wages go up as companies compete for workers, and that also pulls new people into the labor force. Across Barack Obama’s second term and the first three years of Trump’s presidency, we saw more and more people joining the labor force. Then the pandemic struck, causing massive job losses followed by a quick reopening recovery. But now, more than a year has passed, and the size of the workforce is still way below where it was pre-pandemic.

People disagree about exactly how to characterize this loss (about 3% of the workforce), but the one thing we can say for sure is it doesn’t reflect deficient demand for workers. We see lots of job openings and wages rising in lots of industries.

Some of this is probably about personal health. We’ve seen labor force participation among teenagers rise, as higher pay tempts teens into the workforce. At the same time, labor force participation among older workers is distinctly depressed. That gap probably reflects Covid concerns, with more vulnerable people eager to avoid certain risks if they possibly can. And I think everyone understands that “people are reluctant to do jobs because of a raging pandemic” is a different economic situation from “companies are looking to hire,” even if both result in upward wage pressure. The high-demand part of that dynamic is good. But if a Covid treatment pill that reduces the risk of hospitalization by 89% comes onto the market and brings people back into the labor force, that’s also good.

By the same token, it’s excellent news for the economy that Amazon is hiring so many people to work in its warehouses. These are difficult, arduous jobs, but they pay more than the retail and foodservice work that has been America’s emploment of last resort for a while. It’s good for the country that lots of people have been able to raise their incomes by switching into the booming warehouse and transportation sector.

But those workers didn’t arrive from Mars. They got into logistics after leaving some other sector, while the overall workforce has shrunk. New opportunities are good. But it would also be good for the country if other people showed up to backfill those now-vacant positions, particularly in critical sectors that serve as inputs for other industries.

For want of a meatpacker

It’s not hard for me to understand why people with other options are suddenly reluctant to fill job openings in the meatpacking industry. As tough as Amazon warehouse work sounds, it’s nothing compared to meatpacking, which combines a brutal pace of work with a terrifyingly high rate of on-the-job injuries (this is improving somewhat, but it’s still bad). Strong demand means that workers exit meatpacking, and now the companies are offering bonuses as they try and fail to recruit more workers.

The problem is that when meat production goes down, grocery prices go up, and real living standards go down.

Realistically, this is also something that’s always been one of the fabled “jobs Americans won’t do” with a labor force that’s majority foreign-born. Of course, there is some wage rate at which native-born Americans will, in fact, work in meatpacking plants. But that’s a wage that involves much higher grocery prices, lower total output, and lower living standards. There’s also a cap on how high wages can get before this work is simply outsourced to foreign countries.

So what’s up with immigration? Well, in 2017-19, the Trump administration drastically reduced legal immigration. But then starting in March 2020, immigration further tumbled for pandemic-related reasons and has only very partially recovered since Joe Biden took office. All told, David Bier calculates that we are 1.2 million immigrants short of our early-Trump pace, which was a reduction from the Obama pace, which itself was a reduction from the Bush pace.

Issuing “make-up visas” to compensate for past undershooting on immigration would greatly expand the country’s productive capacity and help alleviate some of today’s problems.

Of course we’re talking about meat here, and one response is that it’s good for climate change or animal welfare if people can’t eat as much meat. That’s an argument for another day. For now, suffice to say that vegetarians are also feeling the pain of an inadequate workforce.

It’s good to harvest crops

Indeed, basic crop harvest is in some ways even more given to these labor dynamics because “just import the wheat from somewhere else” is an extremely viable option if labor costs get too high. Most Americans have higher aspirations in life than doing agricultural work in Nebraska, so this is what you get:

“We've struggled on this issue for a long time to try to come up with a more reasonable, common-sense approach,” said John Hansen, president of the Nebraska Farmers Union, which is part of a group lobbying Congress for new immigration laws. Vilifying immigrants “just makes it harder to get there.”

The population trend is clear in Nebraska, where only 24 of the state's 93 counties gained residents. Of those 24, just eight reported an increase in the white population, suggesting that most of the growth was driven by minorities, said David Drozd, a research coordinator for the University of Nebraska Omaha's Center for Public Affairs Research.

The key dynamic in farm work is that — while, again, there is of course some hypothetical wage at which you can persuade people to spend all day picking strawberries — the American consumer will only pay so much for berries. When labor is scarce, it makes more sense to let your strawberries rot on the vine than to pick them:

One thing explained the stark difference between Serrano's two fields: despite offering nearly twice the going wages, he had been unable to secure enough workers to tend and, when the time came, pick his strawberries. The shortage of labor had forced him to perform farming's version of triage and abandon the berries to ensure that he could harvest as many zucchini as possible, which he is contracted to sell to Costco. “Summer squash are this farm's bread and butter,” he explained. “I had to give them first dibs on workers.”

Now again, it’s genuinely great that people are finding job opportunities that are better than “pick fruit for low wages.”

But the problem with immigration curbs as an economic development strategy is that telling unemployed former factory workers in Ohio, “don’t worry, we fixed your problems by getting rid of the immigrants, so now you can go be a berry-picker in California” doesn’t make sense. That’s a downwardly mobile occupational trajectory. The genius of immigration is that these jobs are actually upward mobility for lots of foreign-born people who are eager for the opportunity to come here and work. And them doing that work not only mitigates inflation on the supply side, but it also creates more opportunities for Americans to do higher-value stuff elsewhere in the great economic chain of being.

The immigrant supply chain

If you look at the BLS data on foreign-born vs. native-born workers, immigrants are heavily concentrated in labor-intensive sectors where the cost of labor is very closely related to the prices paid by consumers.

It’s also relevant that in all of these occupational categories except food prep and food service occupations, the output is the input of some other business. If transportation costs rise, that limits the ability of other companies to make hires.

This is also true of very unglamorous forms of work like housekeeping and nannies. A paper that Patricia Cortés and José Tessada published about a decade ago found that “exploiting cross-city variation in immigrant concentration, we find that low-skilled immigration increases average hours of market work and the probability of working long hours of women at the top quartile of the wage distribution.” In other words, in cities with more less-educated immigrants, highly paid women do more market labor and “decrease the time they spend in household work.”

A more recent paper by Delia Furtado confirms Cortés & Tessada and extends their work in two important ways. First, she shows that “high-skilled” women have more children when immigrants are present. Second, she provides further detail on the decline in housework in the presence of immigrant labor, finding that “although immigration is not associated with a decline in mothers’ time devoted to children’s educational and recreational activities, less time is spent on basic childcare tasks.”

Just because there are upsides to the availability of cheap labor doesn’t mean that cheap labor is per se good. We had a prolonged demand shortfall during the Great Recession that depressed wages and allowed for the possibility of very cheap Uber rides. That’s net-net bad for society, even if I enjoyed the low fares. But the whole point of immigration is that, from the immigrant's point of view, a job on the farm or as a housekeeper is a better option than what was previously available.

Expanding production is good

I do want to be clear about something here at the end: supply-side reforms are not a substitute for appropriate macroeconomic policy, and I don’t want to say that legal immigration is the key to addressing inflation any more than improving port throughput is. I’ll write on this later in the week, but fundamentally, demand-side policy needs to adjust.

But here’s what is true: a world of persistently low demand and persistently low inflation generates a lot of situations in which inefficiency appears virtuous, at least in the short term. People in a low-demand/low-inflation world want to hear that this or that initiative will “create jobs.” And by the same token, people in a low-demand/low-inflation world are paranoid that various things — automation, outsourcing, immigration — may take jobs away.

In a world with adequate stimulus, adequate demand, and upward pressure on inflation, that all ceases to be true. Instead, you get a world where the short-term picture and long-term picture align, and it is always better to expand the scope of possible production and find more efficient ways to do things. Immigration is easily one of the best possible ways to accomplish that, and the return of an economy where the big question is “how do we produce more to meet demand?” rather than “how do we parcel out scarce demand so that people have jobs?” should be an opportunity to see that.