Jerome Powell, Chairman of the Federal Reserve Board, speaks during a confirmation hearing before the … [+]
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Bad government policy is a gift that keeps on giving. That’s the message from Federal Reserve Chairman Jerome Powell in a recent speech. Powell cited Trump-era immigration restrictions that led to persistent labor shortages. Economists say recent events are further evidence that a reduced labor supply – which anti-immigration advocates and organizations believe is a good thing – is harmful and even destructive. Taking on fewer foreign-born workers can – and has – lead to shortages and labor shortages that hurt the economy by curbing output and contributing to inflation.
Keeping inflation low is vital to an economy. High inflation undermines the value of income and leads to lower living standards, among other economic problems.
Speaking at the Brookings Institution on November 30, 2022, Jerome Powell said: “The truth is that the path of inflation remains highly uncertain. Leaving the forecasts aside for now, let’s look instead at the macroeconomic conditions we think are needed to bring inflation down to 2% over time.”
“In the labor market, the demand for labor far exceeds the supply of available labor, and nominal wages have been growing at a rate far in excess of what would be consistent with 2 percent inflation over time,” Powell said. “Therefore, another condition we are looking for is restoring the balance between supply and demand in the labor market.
“In mid-2021, signs of heightened tension in the labor market suddenly appeared. At that time, the unemployment rate was significantly higher than the 3.5 percent that had prevailed before the pandemic without any major tension tendencies. Employment was still millions below where it was on the eve of the pandemic. Looking back, we can see that a significant and persistent labor shortage has emerged during the pandemic – a shortage that is unlikely to fully close any time soon.”
Powell cited “excessive retirements” as a contributing factor to the labor shortage. However, he sees no signs that retirees are returning to the labor market in sufficient numbers to reverse the trend.
“The second factor contributing to labor shortages is the slower growth of the working-age population,” Powell said. “The combination of a drop in net immigration and a spike in deaths during the pandemic likely accounts for about 1-1/2 million workers missing.
“Policy to support labor supply is not the Fed’s domain: our tools are primarily on-demand. Without advocating any particular policy, however, I would say that policies to support labor market participation could, over time, bring benefits to workers entering the labor market and support overall economic growth. However, such measures would take time to be implemented and have an impact. In the short term, moderation in labor demand growth will be required to restore labor market balance.” (Emphasis added.)
Washington Post columnist Catherine Rampell pointed out an important footnote on Donald Trump’s immigration policies in Powell’s speech. “Due at least in part to pandemic-related travel restrictions to the United States, overall immigration has slowed significantly since the pandemic began, reducing the labor force by approximately 1 million people compared to pre-pandemic trends,” the footnote reads. “While legal, non-permanent immigration (e.g., H-1B and H-2B visa holders) has recovered significantly since the pandemic began, these immigration categories are still generally below 2019 levels also legal permanent immigration (i.e. new green card holders) slightly lower than in 2019 and well below levels prevailing earlier in the 2010s.”
Economists Giovanni Peri and Reem Zaiour found that there were 2 million fewer working-age immigrants during the Trump administration due to the pandemic and US immigration policies.
In a recent column, Rampell rightly observed, “Visa issuance (to those newly awarded green cards, as well as those in other eligible categories) has recovered this year, according to an analysis by the Migration Policy Institute. But the recent increase is still not enough to offset the cumulative deficit of ‘missing’ immigrants who have never arrived in the past two years.”
Madeline Zavodny, an economics professor at the University of North Florida and a former economist at the Federal Reserve Bank of Atlanta, sees a lasting impact from the policies enacted during the Trump administration, as the policies restricted the entry of many workers. She told me, as Rampell alluded, that even a return to previous levels of immigration will not solve the labor problems, pointing out that the “stock” of labor force and the current “flow” are not the same. “Those years of smaller flows will not be recouped when flows recover to previous levels,” she said. “The immigrant stock still points to a smaller workforce.”
Mark Regets, labor economist and senior fellow at the National Foundation for American Policy (NF`), explains that reducing immigration is a “huge supply shock” to the US economy. “Inflation occurs when demand for goods and services grows faster than supply,” he said. “Increasing our production capacity is the least painful way to control inflation. Increasing the labor supply increases output, but immigrants are also adapting to our needs, which gives dynamism to the economy.”
During the Trump administration, Donald Trump (in 2020) issued proclamations that blocked most immigrants and temporary workers from entering the United States. He also issued policies during his tenure that significantly reduced the number of refugees admitted and limited the admission of family immigrants. Between fiscal 2016 and fiscal 2020, the annual number of legal immigration decreased by 476,143. It’s down more than 150,000 between FY2016 and FY2019. According to an NF` analysis, Trump’s policies resulted in almost 300,000 fewer refugees arriving in America between FY2016 and FY2021.
Madeline Zavodny examined the impact of the sharp decline in international migration during the Trump administration, focusing on 2020. In an NF` report, she noted, “There is no evidence that the entry of fewer foreign workers on temporary visas has reduced the outcomes improved for US workers.” This contradicts a central tenet of advocates of restrictive immigration policies.
“The study examined labor markets that employed more foreign temporary workers before the pandemic and found that the decline in admissions to H-2B programs has not improved, but rather worsened, job opportunities for U.S. workers,” writes Zavodny. “The results also show no gains for similar US workers in the labor markets who had relied more on the H-1B and J-1 visa programs. . . .Persistent labor shortages in many job markets reflect US employers’ need for additional domestic and foreign workers.”
Analysts point out that for more than a century, the anti-immigration movement has been based on the mistaken belief that there is only a fixed number of jobs and that admitting fewer foreign-born workers would lead to more jobs for US workers. During the Trump administration, anti-immigration advocates saw their favored policies implemented. As Federal Reserve Board Chairman Jerome Powell noted, these policies contributed to inflation and continued to hurt the US economy.
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