In other words, why is the United States doing so well? Part of it is immigration. Goldman Sachs released yesterday's “Upgrading Gross Domestic Product and Employment Forecasts to Reflect Increased Immigration (Walker)”:
Recent research shows that census data used for the employment report's household survey underestimate the number of immigrants in 2023. We estimate that immigration in 2023 will be 15,000 above the trend of about 1 million per year, which means that the monthly breakeven rate for employment growth will increase by 80,000 to 155k. We expect immigration this year to be about 1 million more than in previous years, implying break-even employment growth of about 125,000 and 0.3 percentage points higher potential GDP growth in 2024 due to faster labor force growth.
We have updated our employment and GDP forecasts to incorporate continued growth from above-trend immigration. We now expect wage growth to average 175,000 per month this year, slowing to 150,000 per month by the end of the year, although we expect it to only reduce the unemployment rate slightly to 3.8% by the end of the year. We also raised our real GDP growth forecast for the fourth quarter/fourth quarter of 2024 by 0.3 percentage points to +2.4% (or +2.7% for the full year), mainly through upgrading consumption growth.
This is on the back of a report economist This week, there's another Congressional Budget Office Report (About Demographics) Earlier.The most comprehensive analysis of the impact of business cycles is Report by Wendy Edberg and Tara Watson at the Brookings Institution.
One way to understand the supply-side impact of immigration is to look at changes in the labor force (foreign-born and native-born) over time.
figure 1: Above: Changes in the labor force since January 2017 (black line), native-born (blue bars), foreign-born (tan bars), all in 000s, sa Below: leisure and hospitality services, production and non-management Average hourly earnings of workers (black, left scale), food manufacturing (cyan, right scale), both in 2022$. NBER-defined recession peak-to-trough dates are shaded gray. Red dotted line at the start of the Biden administration. Source: BLS, NBER, and author's calculations.
Note that as the share of foreign-born in the labor force changes increases, wages stop rising (leisure and hospitality) and wages in food manufacturing fall slightly before rising again.
How do I explain shocks in the AD-AS model? In Figure 2, immigrants move out of potential GDP (Yn) even if AD shifts to the right.
figure 2: AS and AD change with the influx of immigrants.
As Yn rises to Y'n, the regressive labor force trend (partly due to the increase in foreign-born individuals) shifts the long-run (vertical) aggregate supply curve. This pulls the short-run aggregate supply curve down to AS'. Population growth associated with faster immigration shifts aggregate demand to AD'. In this description, the price level rises only slightly compared to what would have been the case if there had been no increase in labor.
