Immigration Wave Delivers Economic Windfall. But There’s a Catch

WASHINGTON—The influx of millions of unauthorized migrants in recent years has sparked a political firestorm that has paralyzed Congress and consumed election campaigns. But it also has a benefit: a bigger, faster-growing economy.

The precise scale of that economic boost was laid out in the Congressional Budget Office’s latest long-term budget and economic outlook, released Feb. 7. It estimates the labor force will be larger by 1.7 million potential workers in 2024 and 5.2 million more—about 3%—in 2033 than the nonpartisan agency expected one year ago. Gross domestic product—the value of all goods and services produced in a year—should be 2.1% larger.

Because those extra workers will be paying taxes and generating economic activity that also yields tax revenue, the federal deficit should be smaller at 6.4% of GDP in 2033, rather than 7.3% as projected last year.

“More workers means more output, and that in turn leads to additional tax revenue,” CBO Director Phillip Swagel said.

But a bigger economy doesn’t necessarily equate to a better economy. The latest group of migrants differs from previous cohorts in ways that could put modest downward pressure on wages and productivity in the short term.

More than 2.5 million migrants crossed the southwest border in 2023, according to the Department of Homeland Security. That resulted in net immigration of 3.3 million people last year, up from an annual average of 919,000 in the 2010s.

In the border debate, the economy is an afterthought

The politics around immigration have always been sensitive, but the issue has come to the forefront as record numbers of migrants claim asylum at the southern border and head for large cities such as New York and Chicago, where local laws require the cities to offer them shelter. Claiming asylum triggers a legal process that often takes years to resolve and allows migrants to live and work in the U.S. while they wait.

The economic costs and benefits of immigration were an afterthought to the recent compromise effort to overhaul border laws, and its subsequent failure in Congress.

But public opinion on immigration has also long been driven by anxiety about competition for jobs, particularly among less economically secure segments of the population.

“The jobs they hold might otherwise be held by citizens or legal immigrants; the public services they use impose burdens on our taxpayers,” President Bill Clinton said in his 1995 State of the Union address, vowing to crack down on “illegal aliens” entering the country.

The recent influx seems likely to accentuate such concerns.

Before the pandemic, foreign-born adults were almost as likely as the overall population to hold at least a bachelor’s degree. This was mainly due to higher educational attainment among immigrants from Asia, Africa and Europe, which offset lower levels of schooling among people from Mexico and Central America. Highly educated individuals are thought to facilitate innovation, raising the productivity of all workers and ultimately their wages.

Latest migrants differ from previous waves

Data on the most recent arrivals remains sparse. But while researchers have documented migrants from around the world at southern border crossings, the biggest cohorts are thought to be from poorer communities in Latin America.

More important, a much smaller share of the latest immigrants have legal authorization to work in the U.S. than those who arrived in the previous decade. That doesn’t mean they will remain outside the labor force, Swagel said, but it does make it likely that they will skew toward lower-wage jobs in part because lack of work authorization limits access to many occupations.

By increasing the lower-paid share of the labor force, the CBO says the immigration surge will create a modest drag on average wages. It has reduced by 1.7% its forecast for the employment cost index, a measure of private-sector pay and benefits, in 2033.

The injection of more labor into the economy—without a commensurate increase in capital—also tends to reduce the average worker’s productivity. Think about it like this: Five accountants with five computers should each get more work done than six accountants with five computers.

In the U.S., this drag is likely to be most pronounced in the near term. As new machinery is acquired, more infrastructure is built and more immigrants find jobs that match their skills, productivity should improve.

Still, the CBO expects per capita GDP to be 0.8% less a decade from now than it would have been without the increase in immigration.

One question the agency didn’t address is the potential downward pressure on resident workers’ wages from increased competition from immigrants. The lack of data on the latest cohort of immigrants complicates any such estimate.

But economists have noted that an abrupt decline in immigration during the pandemic was immediately followed by labor shortages—and pay spikes—in sectors such as food-service and hospitality, which tend to employ more foreign-born workers. Federal Reserve Bank of Richmond President Tom Barkin said Feb. 8 that the recent rebound in immigration has “helped alleviate labor-market pressures” and thus inflation.

Rico Torres, a 40-year-old roofer from Oaxaca, Mexico, who has lived in the U.S. for 16 years, said he was laid off by a construction company two months ago. These days he stands outside a U-Haul parking lot in Maryland hoping customers who need a helper will pick him. But there are a dozen or so other men doing the same thing, and many days he goes home empty-handed.

“There are a lot of people coming in from other countries,” said Torres. “I think that’s why it’s getting so difficult.”

To be sure, construction activity normally slows in the winter, and the industry is also struggling with high interest rates. Torres said he is hopeful that work will pick up as the weather warms.

In the long run, many economists say, immigration is a net economic positive. Because most newcomers are in their prime working years, they tend to contribute more in taxes than they draw in federal benefits. This is especially important as the U.S. population ages.

“If you have more people, and more people produce more, that creates a bigger economy,” said Giovanni Peri, a labor economist at the University of California Davis who studies international migration. “But does this help people who are employed now? That’s not necessarily the case.”

Write to Paul Kiernan at [email protected]