While aggressive fiscal and monetary stimuli have pushed demand higher, global output has remained constrained by COVID fears, sick workers, premature deaths, early retirements and supply chains disruptions.
There just aren’t enough US workers to meet the increase in domestic demand. Sluggish domestic goods production coupled with global supply chains disruptions mean the US economy is experiencing the highest inflation in more than 40 years.
As the demand for goods increased, domestic production failed to keep up and port congestion worsened. For decades, US politicians on all sides of the political spectrum had wanted a return to goods manufacturing in America. The pandemic highlighted the need to re-think supply chains.
Unfortunately, US politicians often resorted to destructive trade barriers while also empowering labour unions which, by raising labour costs, pushed manufacturing overseas. More recently, US President Joe Biden’s public investment proposal promised to hand contracts to domestic companies only. “Not a contract will go out… that will not go to a company that is an American company with American products, all the way down the line, and American workers,” Biden said.
The problem with Biden’s plan is that it ignores that foreign companies with US operations already hire American residents. And right now, even though many employers are willing to train workers, there just aren’t enough US workers left to fill job openings.
America’s labour shortages are severe. In January 2022, there were a record 10.9 million job openings but only 6.5 million Americans looking for work –0.6 available workers per job opening - according to the Bureau of Labour Statistics.[i] This is compared to as many jobseekers as there were vacancies before the pandemic.
Rather than focusing on which companies get government contracts, President Biden should focus on clearing immigration backlogs since an increase in the number of immigrant workers could boost “Made in America”, reduce labour shortages, alleviate congestion at America’s ports and potentially even help to bring down inflation faster.
Historically, periods of high uncertainty have been associated with higher stock market volatility, less investment, and declines in output and employment. This is because households lower their consumption to increase precautionary savings and aggregate demand falls. In the face of falling demand, businesses tend to delay hiring and let go of more workers. This effect usually leads to fewer voluntary resignations by workers.
This time wasn’t different at all. However, when labour demand fell, fiscal and monetary policy stepped in. The decline in labour demand in April 2020 was short-lived and in the time since, the number of vacancies soared to unprecedented levels during the pandemic and voluntary resignations reached an all-time high. This is because the initial fall in aggregate demand was met by a disproportionate policy response by the fiscal and monetary authorities.
Instead of just filling the hole caused by the pandemic, the outsized fiscal policy measures that included direct cheques to the vast majority of households fuelled consumer spending and a rapid increase in labour demand. On the supply side, a combination of COVID fears, sickness, premature deaths and worker retirements – due to America’s aging population – led to a decline in America’s available workforce.
Fewer goods produced by Americans coupled with global trade disruptions led to more money chasing fewer goods. As a result, US inflation rose 7 per cent in 2021, the highest in 40 years.
Eliminating America’s current labour shortage while strategically bringing back some goods manufacturing to the United States can be accomplished with simple tweaks to US immigration policy.
Despite President Biden’s pro-immigration rhetoric,[ii] the number of new authorised immigrants – for work or family reasons – continues to decline.
First, the Biden Administration is still authorising the rapid deportation of non-citizens. Over 1.5 million people have been expelled[iii] under this programme without the opportunity to seek any immigration status, including asylum based upon a fear of return to their country of origin.
Second, the Biden Administration is facing a large backlog due to agency delays and low caps on the number of new immigrant visas. As of 2020, there were already more than 9 million potential immigrants waiting to obtain legal permanent residence status in the United States, according to research by the Washington DC based Cato Institute.[iv] The caps on each country and outdated immigration rules also mean that as many as 80,000 “unused” immigrant visas expired in 2021, prolonging the wait for many applicants.
Since roughly half of applicants for permanent residence each year are already in the US with temporary work authorisation, addressing labour shortages would require approving without delay the change of status of workers who are already in the country. This would free up resources for faster admissions of workers who are currently waiting abroad.
US immigration policy has traditionally favoured family reunification, limiting the number of those who sought to enter the United States for the purpose of employment. Meanwhile, employment-based immigration has been subject to quotas that have traditionally resulted in demand outstripping the supply of work-based immigrant visas.
While the family reunification policy has helped to mitigate falling US population growth rates, eliminating roadblocks for US employers who want to hire foreign workers could increase America’s workforce, drastically cut America’s current labour shortage and raise potential output. It is because potential output – the economy’s capacity to produce – fell that the surge in demand triggered higher inflation than policymakers expected.
Although an increase in the population would further raise demand for goods, including housing – which is already experiencing large inventory shortages – immigrants’ contribution to value added tends to exceed their population share, thus resulting in higher productivity growth. Immigrants also tend to be more entrepreneurial[v] than natives.
Furthermore, increased longevity and stagnant or declining birth rates are a major challenge for the United States. Research[vi] published by the Bank for International Settlements shows that there is a link between demographic shifts and inflation. An increase in the share of old-age Americans – retirees - puts upward pressure on prices and is generally associated with higher inflation. Dependants spend but no longer work. On the other hand, an increase in the share of working-age population has the opposite effect. Inflationary pressures are likely to remain elevated due to the increasing share of dependants and a declining share of workers. New immigrant workers are younger on average than the US population.
Lastly, US immigration policy should aim to fill vacancies in high productivity sectors while looking to admit younger workers, as well as those who possess skills absent in the current US worker population.
A workforce of 1.6 million immigrants[vii] were waiting to fill vacant jobs in the United States in 2021. There are close to 11 million job openings. The fear that immigrant workers will replace US workers is absurd and hurts all Americans – not just those who are kept out by antiquated immigration rules.
As US inflation climbs higher and the risk increases that economic growth will slow to a standstill, waving the immigration wand is one way this US government could prolong the current economic expansion.
Dr Orphe Divounguy
Orphe Divounguy is a Senior Economist at Zillow Group Inc. Divounguy is the former Chief Economist at the Illinois Policy Institute. Divounguy is also the founder of the Quantitative Research Group and the co-host of the Everyday Economics podcast. Divounguy’s columns and articles cover fiscal policy, labor economics, and quantitative methods for programme and policy evaluation. Contact: firstname.lastname@example.org. The views presented here do not necessarily reflect the views of his employers.