The Numbers vs. the News: How Immigration Shapes Labor Markets
In a climate of increasing polarization, many issues facing the United States become political talking points used by Democrats and Republicans alike to garner support for their causes. As such, information presented to the general public regarding these topics is often heavily influenced by political agendas and biases. One such topic that has become particularly prominent in recent years is immigration and its effects on the US economy. Many claim that immigration negatively affects the domestic labor market, driving down wages, reducing hours worked and limiting employment options for domestic laborers.
In reality, in the vast majority of cases immigration does not negatively affect domestic workers’ wages or employment opportunities. In fact, the opposite is often true, with immigration creating wage stability and even wage growth, without depleting jobs. Given recent conflicts over state and federal responses to immigration, and the increasing tensions regarding how the US will address the so-called “border crisis” and other immigration-related issues, it is important to examine the facts, rather than relying on conjecture.
Firstly, one of the most frequent claims made about the effects of immigration is that it negatively affects wage growth for domestic workers. In truth, immigration usually contributes to wage growth, or at the very least wage stability in the overall economy. Over time, an influx of immigrants creates steady growth in the workforce. In response, firms will increase investment in the workforce to ensure that the ratio of capital-labor increases as well. This is reflected in the raised wages of workers in the long run. All firms are incentivized to have a high capital-labor ratio because it means that their production is more efficient per additional worker that they hire.
Thus, the influx of workers from immigration will be offset by the efforts of firms to increase their investments of capital to re-raise the ratio of capital-labor back to its original levels. This investment of capital will lead to higher real wages for workers. One study finds an increase between 2.1 to 6.5% (depending on education level) from 2019 to 2022 in wages for native born US workers as a result of changes in hours worked due to net immigration.
Immigration can also lead to a decrease in aggregate prices, which is equivalent to an increase in real wage growth. Immigrant laborers tend to work in fields that do not heavily compete with native workers such as construction or agriculture, and an influx of laborers in these markets allows native-born farmers, contractors, and other such employers to expand their production, increasing crop yield or home production. In turn this creates new employment and residential opportunities for native born and immigrants alike.
This is often complemented by an expansion of domestic businesses to serve the new market for goods and services that result from this process. The higher supply of workers tends to lower prices in the aggregate, meaning that for native born workers they can see an increase in the real value of their wages given that they work in any of the industries that do not compete with the influx of immigrant labor.
In other cases it has been found that immigration simply maintains the status quo. For example, one 2008 study shows that the growth of wages for domestic workers grew 0.1-0.6% over a period of about 15 years, which is a minimal amount. Alternatively, immigrant labor can serve to dampen the effects of an economy with too much wage growth. A 2024 study finds that immigration has stabilized the labor market and regulated wage growth in industries with high immigrant labor presence, a result of labor shortages in the post-COVID labor market.
While in the short run these labor shortages would serve to increase wages for native born workers, the upward pressure on wages would necessarily be followed by upward pressure on prices, which in the long run would offset any gain felt by the increased wages. So, immigration in this instance technically dampens wage growth, but serves to stabilize real wage growth in the aggregate.
The next most common talking point is the familiar refrain that “immigrants are taking our jobs.” The quickest and simplest way to refute that is using the laws of supply and demand. When there is an influx of immigrants there is an increase in demand for the same goods and services that domestic households would need either for necessities or luxuries.
Consequently, this puts upward pressure on the supply of these goods and services, which means more jobs created to increase supply. One United Nations study shows that approximately 85% of wages made by immigrant workers is spent in the markets of the countries they move to. Thus, income made from wages of immigrant workers is, in the large majority, spent in the domestic market, again reinforcing the boost in domestic demand through consumer spending which demonstrates how immigration boosts employment.
Another important aspect of the immigrant labor workforce is that a significant portion of them lack the education and language skills necessary to take high-skilled/high-paying jobs that would be available to native born workers. This creates circumstances in which oftentimes, the greatest competition that immigrants face for finding employment is other immigrants. The lack of skills relegates the influx of laborers to markets such as agriculture or contracting, which already employ high numbers of immigrants.
Furthermore, if immigration was truly negatively affecting employment opportunities for the domestic workforce, it would be expected that the US would be experiencing record high unemployment. The percentage of immigrants in the workforce is continually increasing. However, employment rates are at record lows, while the prime age labor force participation rate (LFPR), is higher than ever.
Some might argue, as has been stated before, that immigrants are mostly concentrated in particular industries as a result of their populations’ overall skill deficit. However, even factoring in this lack of education when comparing immigrant laborers to domestic workers with similar levels of education, no discrepancy is found that would suggest a crowding out of domestic laborers. Among prime age men with less than a bachelor’s degree, the most commonly represented demographic within immigrant laborers, the LFPR has continued to grow, even outpacing pre-COVID trends. This is contrary to what would be expected if immigration had a negative correlation with domestic employment rates.
A lesser explored aspect of the effects that immigration has on the US economy, is the other, less tangible effects of immigrant laborers. These effects tend to be less transparent and are also not strictly measurable. For example, immigration is tied to higher than average rates of innovation. A survey conducted in 2011 showed that around half of the top fifty venture capitalist funded companies had at least one founder who was an immigrant and around three quarters of the companies saw immigrants holding high level management or research positions such as CTO, CEO, or VP of engineering.
Other evidence shows high correlations between foreign born students and degrees in the sciences and engineering, which is often a pathway towards jobs that innovate. Immigrants also produce patents at rates up to double those of native born workers, with around three quarters of all patents produced from the top 10 highest patent producing educational institutions having at least one immigrant author in the year 2010.
Immigrant labor can also serve to offset the aging native population of the US. Immigrants tend to be young and have large families, which means that as the US government faces ever-increasing amounts of entitlement payments such as social security, immigrant laborers will help alleviate the labor shortages that are threatening their funding. The percentage of the native born US population that is over 55 is increasing, while the percentage of the population that is between the ages of 24-55 is decreasing. This, coupled with the decrease in labor force participation rate in those over the age of 55, would lead to an overall decrease in labor force size and cause labor shortages if it was not offset by the influx of immigrant labor.
The immigrant population, in contrast to the native born population, is not aging, and has a much larger percentage of the population at or below working age. They also have higher rates of labor force participation almost across the board. Contrary to popular belief, even undocumented immigrants pay taxes and support Social Security, Medicare, and other federal entitlement programs, oftentimes not even receiving the benefits of these programs. Combined with the legal immigrant population, they contribute hundreds of billions of dollars of federal tax revenue yearly.
Despite these benefits, there are some disadvantages to the influx of immigrant labor. These downsides are almost exclusively in regards to the native born population that has less than a high-school education. Some studies have shown that due to competition in low-skill industries such as agriculture and construction, there have been decreases of up to 5% in the wages of native born workers with less than a high school diploma. However, this is counteracted by the fact that the percentage of the native born population that have not completed high school is decreasing over time. Thus, over time the percentage of the population which the decrease in wage growth would affect would also decrease.
Regardless, this is still a valid point of critique, and it does demonstrate that like most issues there are both positive and negative aspects to its results. One of the most common proposals to solve this problem is to increase the incentives for high-skill immigrants to come to the US. In fields like law, management, medicine, engineering, and some other STEM fields, there is a high demand for laborers. Encouraging immigrant populations to shift towards those fields through policies such as those that tailor employment based visas towards high-skill labor markets would help alleviate the pressures on lower-skilled labor markets and safeguard domestic workers in those areas.
Overall, immigration is a positive influence on the US economy and the negative impacts are greatly exacerbated and not tied to fiscal realities. Immigration in the long run serves to either stabilize or increase wage growth, does not affect employment rates to any substantial degree in the vast majority of industries, and in those it does tends to foster competition between immigrant workers rather than with native born workers, and lastly it serves to enhance productivity and innovation within domestic firms.