Immigration's Effect On The Economy – Across the country, there are over 11 million jobs waiting to be filled and a shortage of workers to fill them. Labor shortages, including serious challenges in specific sectors and regions, contribute to high inflation by limiting production, increasing wages at an unsustainable pace, and changing business planning decisions. Labor shortages can also make it easier to fall into a recession by reducing the US’s underlying economic growth rate. In the longer term, these shortages will put a serious strain on the country’s fiscal health, as fewer workers pay taxes, including Social Security and Medicare.
Even if all the currently unemployed workers could fill those job openings, the nation would still have a shortfall of more than 5 million workers. The pandemic drove many workers out of the workforce; however, lower participation is estimated to be only about 2.4 million lost workers—still not enough to fill the gaps.
Immigration's Effect On The Economy
Our nation’s workforce at all skill levels needs to grow—rapidly—to meet the demands of the U.S. economy and match workers with the skills employers need. Increasing America’s workforce participation is essential, but that effort alone will not meet demand.
Reforming The Immigration System: A Brief Outline
These disruptions have collided with long-term, very tumultuous demographic trends in the United States. The US population is aging rapidly, and US birth rates continue to decline. The result is a projected long-term labor shortage in the United States that jeopardizes our economic growth.
Exacerbating the problem is the sharp drop in immigration since 2016. Historically, immigration has contributed to the dynamism and innovation of our economy. As the US population ages, immigration to avoid a shrinking workforce is indispensable to solving the labor shortage in the US to keep the US globally competitive.
Resolving short-term and longer-term labor challenges is critical to maintaining US competitiveness and global economic leadership. Public and private sector leaders will need to adopt a two-pillar approach: 1) pursue policies that will increase US labor force participation while 2) implement comprehensive immigration reforms, including increasing legal immigration, reducing the flow of illegal immigrants, and reforming significant employment-based immigration across all skill levels. Further delays in immigration policy reform will continue to put severe pressure on the US workforce, which will limit innovation, productivity and overall growth.
This Solutions Brief analyzes the US workforce shortage, recommends solutions for increasing the labor force participation rate of American workers (and potential workers), and shows why increased immigration is an indispensable part of the answer to our workforce challenges. It builds on an earlier Answer Brief that focused primarily on increasing participation in the US workforce: The US Labor Shortage: A Plan to Meet the Challenge.
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The demographic transition facing the country presents very arduous challenges in the long and long term. Our population is aging rapidly, while US fertility rates continue to decline. The inability to meet the demand for labor now, along with slowing population growth, is damaging the nation’s ability to fight inflation, increasing the risk of recession, and jeopardizing economic growth in the long term. Rebuilding the U.S. workforce will require public policy leaders and business leaders to work together on a two-pillar approach: increasing America’s worker participation rate and comprehensive immigration reform.
The US economy currently has 11 million unfilled jobs. There are currently 5.7 million unemployed workers, leaving a workforce shortfall of more than 5 million, even if all unemployed workers filled open roles
These almost never openings span across industries and skill levels, with insufficient workers in number and by specific occupational skill sets to meet current demand. Some industries that were among the hardest hit by the COVID-19 pandemic are facing serious hiring challenges. Job openings in healthcare, retail, and leisure and hospitality businesses reached record levels in 2022, and today the three sectors have a total of 4.5 million unfilled jobs. There are also significant shortfalls in manufacturing, with nearly 800,000 openings; 500, 000 in transportation; and 400,000 in construction (Figure 1)
Some regions are also having much more difficulty finding workers, with states in the South unable to fill 4.2 million jobs, an increase of nearly 60 percent over 2019 levels, compared to a jump of 50 per per cent in the West and almost 40 per cent in the Midwest and North East. regions. In particular, the pandemic increased long-standing labor challenges in many rural areas,
Immigration Reform: An Essential Key To Growth
The shortage today can also be seen in Figure 2, where January 2023 employment by occupation is compared to the levels expected if the pandemic had not occurred. Data shows that both higher and lower skilled jobs were affected:
These shortages have had direct economic consequences, most poignantly helping to drive inflation to a 40-year high in 2022. There is a shortage of workers in transport and warehousing, where a fifth of the workforce consists of immigrants, has limited the supply side of the supply. chains, causing delays and failures to fulfill orders, ultimately raising prices.
In agriculture, food price inflation had increased long before the Russian invasion blocked food trade. Farm operators cited labor shortages and specifically reductions in immigration for pushing food prices higher,
These sector shortages not only lead directly to real economic effects that can spill over into fragility in other industries, but they also raise the long-term risk of inflation through wage price spirals. Addressing shortages broadly while also recognizing sector-specific challenges is necessary to make the economy more resilient against unpredictable future events and more globally competitive.
Will Japan’s Population Shrink Or Swim?
Roughly expect that by 2030 new entrants will be unable to meet demand in many of the same industries that are currently facing challenges. In particular, difficulties in finding available workers for manual labor jobs and some service industries are expected to continue. As the country leverages historic investments in green technology, infrastructure, and advanced manufacturing, demand for workers in skilled trades such as electricians, solar installers, welders and mechanics is expected to increase, but the pipelines for these trades all short of willing workforces in sufficient numbers. The most severe shortages are expected in health-related occupations at all levels. This will have a particularly negative effect; as the population ages and the demand for health services continues to rise, the supply of talent in the pipeline will be far less than the demand.
The demographic transition facing the country is unparalleled in the recent history of the United States. Our population is aging rapidly: the ratio of people aged 25 to 64 to older people has fallen from 4:1 in 1980 to under 3:1 today and is expected to fall below 2:1 by 2050.
Meanwhile, US fertility rates continue to decline, from 3.0 children per woman in the 1960s to less than 1.7 children in 2020.
The Congressional Budget Office predicts that the US population will grow between 2023 and 2053 at one-third the pace of the previous 30 years. By 2042, the United States is expected to reach a critical inflection point where deaths will exceed births, leaving immigration as the sole driver of US population growth.
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Without reforms to inject immigrant workers into the workforce, these trends will make it increasingly difficult to meet future labor demand, jeopardizing long-term economic growth.
The United States is not the only country facing demographic challenges that affect the workforce. In Japan, for example, the working-age population peaked in 1991-1993 at a higher rate (nearly 70 percent) than the United States currently has, according to the IMF. It has fallen to 59 percent and will continue to fall, not least because Japan is traditionally a country of low immigration.
In response, Japan has added more women and older workers to its workforce—steps the United States should take as well. And it has increasingly relied on automation and robotics to increase worker productivity – steps that have social as well as economic implications.
But IMF research analyzing data from 1990 to 2007 (the period when the workforce began to decline) also shows that “the aging of the working-age population has had a significant negative impact on total factor productivity.”
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Germany, too, faces workforce demographic challenges. In 2019, the median age of the German population was 46, almost four years higher than in France, and this is expected to rise to 49.2 years by 2045, posing challenges to Germany’s fiscal position.
China announced at the beginning of 2023 that its population had begun to shrink – having reached the pivotal point where its deaths the previous year exceeded its births. China’s efforts to offer incentives to start families, including tax cuts and the relaxation of its one-child policy, have not been able to halt the decline, and its national policy to boost birth rates is not predicted to be successful.
While Japan and Germany have been able to adapt somewhat to these demographic changes and China continues to struggle to find solutions, there is no reason for the United States to take the risk of future labor shortages when solutions exist to increase the workforce among the current US. workers and to compete in the global market for the workers our economy needs
Compounding the current shortage and exacerbating long-term challenges, legal immigration has fallen significantly in recent years, rebounding only in 2022. The annual net inflow of immigrants has decreased significantly since 2016, when 1.25 million more immigrants entered the country than left, compared to 915,000 in 2019; 726,000
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