Immigration is breathing new life into an ageing US job market, and any reform that constrains the expansion of the workforce may well end up harming economic growth, the CEO of the Federal Reserve of Dallas said in an essay published in April.

“Not everyone realises the demographic issue in the US,” says Robert Kaplan, who is also president of the Dallas Fed. “Our native-born workforce growth is going to be negative in the next 20 years. We are not telling policymakers what they are to decide, but we are saying that immigration is a key element of growing GDP. Furthermore, if you are going to do the tax reforms, the tax legislation we just did, to get the benefits of it you don’t want to be in a position where, while you are creating a stimulus in one place, you are constraining growth by constraining the workforce.” 

Filling the gap

Immigrants and their children made up 50% of working-age population growth in the US in the past 20 years and they will make up even a larger share in the next two decades, fully contributing to growth of the working-age population in the country as the retirement of baby boomers leads to a net decline in the working-age population of native-born workers, the Dallas Fed estimates.

Applying a neoclassical growth model, where GDP growth is the result of increases in labour supply plus improvements in labour productivity, Mr Kaplan concludes: “Having a flow of immigrants is going to be essential to create workforce growth in the US, and if your workforce growth is sluggish, that creates headwinds for GDP growth at a time when government debt to GDP and entitlements are historically high, which means we need GDP growth to service the debt.”

Immigration remains a highly sensitive political issue in the US, as well as elsewhere, and president Donald Trump made his fight against illegal migrants from Latin America and those coming from certain Muslim countries a pillar of his 'America First' platform. He is urging Congress to back his proposed wall running along the border with Mexico and other measures, such as a crackdown on so-called sanctuary cities, where federal immigration laws have little traction.

Immigration flows into the US have already slowed in the past decade due to a combination of factors, including slower domestic growth in the wake of the global financial crisis, tighter policies on unauthorised immigration already in force during the Obama administration, and better economic conditions across the border in Mexico. Mr Trump is now promising to tighten up further access to the US and its job market.  

A necessary conversation

The Dallas Fed does not get into the details of Mr Trump’s immigration policy itself and its consequences on the economy, “but it’s enough for us to say that workforce growth goes in the right direction of GDP growth, and if I’m saying that the native-born workforce is going to be negative in the next 20 years, that’s already a good start [for a conversation]”, says Mr Kaplan.

Immigration affects not only quantity, but also quality of the workforce, Dallas Fed figures show. Half of college-educated immigrants majored in science, technology, engineering or mathematics (the STEM subjects), far outpacing US-born college-educated workers (at about one-quarter). Other research shows highly skilled foreign-born workers also patent at higher rates than native workers, largely as a result of their concentration in the STEM fields.

“We need to come to grips with immigration reform in order to supplement labour force growth in the US,” the Dallas Fed concludes in its report. “These reforms could encourage greater emphasis on employer-based and skills-based immigration. Whatever the decisions made by policymakers, this discussion is important to creating greater GDP growth in the US.”