Many commentators have argued that the recent surge in legal and illegal immigration is causing inflation to cool by reducing wages. A January 15, 2024, Yahoo Finance article states that immigration “has already done a great deal in bringing down consumer price growth”. The Wall Street Journal made the same argument late last year, arguing that immigration helps to “ease labor shortages and wage and price pressure”. A host of advocates have called for more immigration to lower wages and prices in the last two years. Ironically, this is a complete reversal of their position before inflation spiked, which was that immigration had little or no impact on wages. Interestingly, none of the recent news stories have quantified the impact on prices. The reason may be that, mathematically, the effect of recent immigration on prices must be very small.
Overall, immigration has increased the supply of workers through the fourth quarter of 2023 by about 2.07 percent (3.3 million).1 This increase in the supply of workers represents the total number of workers in the fourth quarter of 2023 who entered in 2020 or later based on the Current Population Survey. It is extraordinarily difficult to see how an increase in the supply of workers of this size could have “done a great deal” to bring down consumer prices by reducing wages.
We can get a back-of-the-envelope estimate of recent immigration’s impact on wages. As discussed in our prior post on immigration and inflation, the typical assumption is that each 1 percent increase in the supply of workers reduces wages by 0.3 percent, which is called the elasticity of wages. Thus, a 2.07 percent increase in labor supply may have reduced wages overall by 0.62 percent — 2.07 percent times 0.3. The current estimate is that labor accounts for 60 percent of GDP. If we take the 2.07 percent increase in the supply of workers and multiply it by an elasticity of 0.3, and then take into account labor’s 60 percent share of GDP, we get a 0.37 percent reduction in consumer prices.
This estimate comes with several caveats. The first is that in a complex economy the response of firms to the availability of immigrant labor may take many forms other than lowering wages. This analysis also assumes that all the savings in wages are passed on to consumers rather than retained by employers in the form of higher profits. Moreover, this estimate makes no allowance for the increase in demand for goods in services that would occur from adding millions of immigrants to the country, which itself is inflationary.
The Excel sheet linked here shows that many of the occupations where immigration increased the supply of workers most tend to be relatively low-paying. Partly for that reason, these jobs account for only a small share of overall wages and salaries paid to workers in the U.S. economy. It is not at all clear that using immigration to reduce the wages of the poorest workers is good public policy. For example, the “farming, fishing, and forestry” category, where recent immigration increased the number of workers the most, accounts for just 0.29 percent (Column 4) of all wages paid in the U.S. If we weigh each occupation by its share of all wages and salary paid, then the increase in the supply of labor caused by recent immigration would reduce consumer prices by 0.32 percent, which is even less than the 0.37 percent estimated above. Of course, this assumes that capital represents the same share of prices in every occupation, which is an oversimplification.
Despite the caveats, when we look at the data, the idea that recent immigration had a significant impact on inflation by reducing wages does not really make sense. The recent increase in the total labor supply is too small, and the areas of the economy where immigration increased the supply of workers most are too low-paying, to have a large impact on prices.
1 The data comes from the public-use files of the Current Population Survey (CPS), which is collected by the Census Bureau for the Bureau of Labor Statistics. The CPS is the source of official unemployment and other labor force data. The CPS asks immigrants when they first came to the United States, so identifying new arrivals is easy. The BLS and Census Bureau are clear that illegal immigrants are included in the data, although some are missed.