What Happened When Immigration Fell?

By Steven A. Camarota

Tuesday, May 16, 2023

 

We are often told that America must have very high levels of immigration — otherwise, businesses will be deprived of the labor needed to expand. CEOs from retail to technology have recently made this case, as have allied politicians from both sides of the aisle.

 

But is it really true?

 

The period between 2016 and 2019 represents a good test of this argument because both legal and illegal immigration fell substantially. If immigration enthusiasts were right, the economy should have sputtered, but that’s not what happened. In fact, GDP grew, inflation remained low, and — perhaps most significantly — wages for less educated American workers not only grew but grew at a faster rate than for high-skill workers.

 

After peaking at 1.75 million in 2016, the total number of new immigrants (legal and illegal) fell to 1.45 million in 2017, followed by 1.34 million and 1.36 million in 2018 and 2019, respectively. Of course, there is always some undercount in Census Bureau survey data, but the rate of undercount tends not to change from year to year, so there is little question that new arrivals declined significantly.

 

Moreover, the Census Bureau estimated that net migration — the difference between the number of people arriving in the country versus the number leaving — also fell significantly. Fewer immigrants came, and more of the people already here left.

 

A stronger economy traditionally encourages more immigrants to come, especially illegal immigrants, but that was not true in the first three years of the Trump administration. Immigration slowed almost certainly because of the administration’s restrictive policies — including a reduction in refugee admissions, efforts to curtail welfare eligibility for new immigrants, the Remain in Mexico policy for asylum seekers, more worksite enforcement against employers who hire illegal immigrants, increased fencing at the border, efforts to end temporary protected status and Deferred Action for Childhood Arrivals, as well as some smaller administrative changes that cumulatively made a difference.

 

So what, if any, impact did the decline in immigration have? First, total GDP growth in these three years was actually higher than in the preceding three years — 7.5 versus 6.7 percent. The inflation rate, which is now such a concern, was about the same in the first three years of the Trump presidency as it had been in the years before.

 

Importantly, real (inflation-adjusted) weekly earnings for full-time U.S.-born workers without a bachelor’s degree grew 3.2 percent between the fourth quarters of 2016 and 2019, whereas it had actually declined slightly from 2012 to 2016. In addition to an increase in earnings, the labor-force-participation rate — the share of working-age adults either employed or actively looking for work — also increased for the less educated U.S.-born. In contrast, there was little improvement in labor-force participation in the years before 2016, after the rate bottomed out in 2013 as a result of the Great Recession.

 

These workers earn much less on average than those with a college education, and their earnings had increased little in recent decades. Those without a college degree make up the overwhelming majority of the working poor, particularly those with children. Moreover, they are the primary beneficiaries of the earned-income tax credit and refundable child tax credits aimed at low-income workers. If they earn more in the labor market, the cost of the welfare state will lessen.

 

While labor-force participation remained well below what it had been two decades earlier, the improvement in the rate was certainly good news because it has been declining for many years among 18- to 64-year-olds without a college degree. The long-term decline is one of the most troubling social trends in American society, as it is associated with a host of social pathologies from substance abuse and welfare dependency to mental illness and crime. Even with the modest improvement before the pandemic, we still have far to go in getting less skilled Americans back into the labor force.

 

As for workers with a college degree, they generally did well in both periods of lower and higher immigration. There are a number of possible reasons for this. First, immigrants make up a larger share of workers in less skilled occupations compared to higher skilled occupations. We also found that immigrants who work in lower skilled occupations generally earn less than the U.S.-born employed in the same occupation. This raises the possibility that less educated immigrants may be willing to work for less, thereby undercutting native wages. Interestingly, this pattern is not evident in higher skilled occupations.

 

It is also possible that high-skill immigrants tend to complement high-skill natives in ways that is not the case for the less skilled. For example, an immigrant surgeon or engineer might impart skills to his U.S.-born counterparts that could increase their productivity and earnings. This is less likely to be true for immigrant groundskeepers or waitresses. In short, there is no reason to assume that immigrants with different levels of education will necessarily have the same impact on workers or the economy.

 

What’s happened since 2019? Covid-19 hit at the beginning of 2020, and the accompanying shutdowns had a very negative impact on the economy. Real earnings for virtually all workers, immigrant and U.S.-born, declined from 2020 to 2022, in part because of the high inflation. However, the decline in earnings also coin­cides with a dramatic rebound in immigration. While we cannot say with certainty because all the data have not been released, the available information indicates that more than 4 million immigrants (legal and illegal) settled in the United States in 2021 and 2022. The decline in earnings for virtually all workers, particularly lower paid and less educated Americans, should give pause to those advocates now calling for more immigration to reduce inflation by lowering wages even more.

 

The immigration slowdown in the years just before the pandemic illustrates what can happen when government policy reduces immigration during an economic expansion. The available evidence from 2016 to 2019 indicates that less educated American-born workers did better, although of course we cannot establish a causal relationship with certainty. What we can say with certainty is that immigration fell, the economy expanded, and lower paid American workers did well — all without sparking inflation. This runs directly counter to the oft-heard argument that very high levels of immigration are necessary for the American economy to prosper.

 

Well-known economist Paul Samuelson observed six decades ago: “After World War I, laws were passed severely limiting immigration. Only a trickle of immigrants has been admitted since then. . . . By keeping labor supply down, immigration policy tends to keep wages high.” The short-lived immigration slowdown a few years ago seems to confirm this truth. It turns out that the basic laws of supply and demand apply to immigration, after all.