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America Needs More Immigration to Defeat Inflation
Only Foreign Workers Can Alleviate U.S. Labor Shortages
By Gordon H. Hanson and Matthew J. Slaughter
December 19, 2022
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https://www.foreignaffairs.com/united-states/america-needs-more-immigration-defeat-inflationConsumer prices in the United States rose at an annualized rate of 7.7 percent in October, the ninth straight month above seven percent, thanks to still surging demand and stumbling supply. All eyes are fixed on the U.S. Federal Reserve to cool demand by hiking interest rates. But monetary policy has always worked with long and variable lags, which makes the Fed’s job of trying to shape the decisions of the country’s 122.4 million households, 164.5 million workers, and 35.1 million businesses even more daunting.
There is something else that U.S. policymakers could do to battle inflation, however. They could expand immigration for both skilled and less skilled workers to boost the supply capacity of the U.S. economy. More immigration would help meet today’s excess demand for labor, which over time would limit wage and price growth. In October, there were an astonishing 10.3 million job openings in the United States, 4.3 million more than the total number of unemployed Americans. In the short term, expanding the number of H-1B visas for skilled professionals and H-2B visas for seasonal nonagricultural workers would help employers overcome this acute labor shortage. In the longer term, doing so would also help cool inflation.
THE GREAT IMMIGRATION SLOWDOWN
Despite the sensational headlines about chaos along the U.S.-Mexican border, immigration to the United States has been effectively flat for the last decade. Between 2011 and 2021, the share of the U.S. population that was foreign born nudged up only slightly, from 13.0 percent to 13.6 percent, reflecting a dramatic falloff in foreign labor inflows. Whereas net immigration to the United States was 890,000 arrivals per year during the first decade of the millennium, that number fell by nearly half to 480,000 per year in the succeeding decade.
The immigration slowdown was caused in part by the Great Recession that began in 2007 and the sluggish recovery that followed, which deterred some foreign workers from coming to the United States. But U.S. immigration policy also made it harder for aspiring migrants to enter the country. Prior to the COVID-19 pandemic, the United States cracked down on undocumented immigration but kept the supply of temporary work visas fixed. Because each new cohort of temporary visa holders replaces a previous cohort, and because the U.S. economy grows every year, a constant supply of visas is a recipe for an increasingly native workforce.
In 2019, the United States issued roughly the same number of H-1B and H-2B visas as it did a decade earlier. The same is true of J-1 visas for sponsored foreign visitors, many of whom end up working at U.S. universities or research facilities. The only visa category that has grown substantially since 2010 is the H-2A, which grants temporary admission to agricultural workers. After the outbreak of COVID-19, all these programs were temporarily halted as U.S. embassies around the world paused most consular services. Today, most U.S. embassies are slowly restoring their visa-processing efforts, but consular staffing has yet to reach pre-pandemic levels.
The rapid decline in immigration has made it harder for U.S. labor markets to function properly. In addition to offsetting the long-term decline of U.S. birthrates, foreign-born workers have the virtue of being much more mobile than native-born workers. When job growth picks up in one region or drops off in another, workers born abroad are the first to respond, helping reduce regional misallocations in the U.S. labor supply. Without these workers, the U.S. economy can find itself tied in knots, as it has during the pandemic.
The U.S. hospitality industry is a case in point. In 2019, 22.0 percent of job holders in entertainment, accommodation, and food services were foreign born. The pandemic has been particularly hard on businesses in these sectors, making it difficult for them to find workers. And because the supply of U.S. visas has remained stagnant, these businesses have not been able to rely on immigrants to fill their vacancies. By the end of 2021, the share of entertainment, accommodation, and food service workers who were foreign born had slipped to 18.4 percent—a drop of more than 3.5 percentage points. Meanwhile, the job vacancy rate in the hospitality industry has increased markedly; in October 2022, 9.2 percent of jobs in accommodation and food services were vacant, well above the economy-wide rate of 6.3 percent.
WHERE ARE THE WORKERS?
Expanding the H-2B visa program, which authorizes the temporary employment of nonagricultural foreign workers for up to nine months, would be an obvious solution to this problem. Common jobs for H-2B visa holders include restaurant worker, meat processor, and construction laborer—precisely the jobs for which U.S. companies are desperate to hire and for which American workers seem to be chronically scarce.
Yet Congress has set a limit of just 66,000 H-2B visas per year—a tiny fraction of the current 1.8 million job openings in construction and food services alone. For the 2021 fiscal year, an additional 22,000 visas were made available to U.S. employers willing to attest that no American workers were “willing, qualified, or able” to perform the jobs they wished to fill. But with millions more jobs sitting vacant than there are unemployed Americans, this one-time supplement was a drop in the bucket. A much higher cap, as much as ten times the current one, should be authorized for 2023.
Increasing the number of H-2B visas will not crowd out U.S.-born workers. According to research by the economists Michael Clemens and Ethan Lewis, firms that win the H-2B visa lottery and hire foreign workers tend to also slightly increase the number of American workers they employ—and boost their revenues. In other words, foreign workers on H-2B visas complement, rather than replace, U.S.-born workers in less skilled jobs. This finding resonates with a larger body of research showing that immigrant workers have at most a modest effect on the wages of native-born workers.
Why not congratulate every foreign-born graduate with the gift of a visa?
The United States should also dramatically expand the H-1B visa program, which allows U.S. companies to create new jobs for highly educated foreigners for three to six years. Right now, the United States caps the number of new private-sector visas at 85,000—65,000 for workers who possess a bachelor’s degree or higher and 20,000 for workers with at least a master’s degree. For decades, demand for H-1B visas has far exceeded supply. In the 2022 fiscal year, 308,613 people sought H-1B visas before the U.S. government stopped accepting applications.
The low cap on H-1B visas constrains not just the U.S. labor supply but also U.S. productivity growth. Highly skilled immigrants boost innovation in several ways. They generate more patentable ideas and technologies than do U.S.-born workers, and they are more likely to found companies. Companies that scale up their hiring of skilled immigrants also tend to scale up their hiring of native-born workers, underscoring once again that the two categories of workers complement each other. Moreover, skilled immigrants tend to boost the wages not just of skilled native-born workers but also of less skilled native-born workers.
Expanding the number of H-1B visas issued each year would increase U.S. supply capacity by both addressing labor shortages and spurring productivity growth. Perhaps one of the simplest ways to do this would be to give more H-1B visas to foreign-born individuals who have already self-identified as both highly skilled and willing to live in the United States: foreign-born students enrolled at U.S. colleges and universities. Last academic year, there were 914,095 such international students in the United States. This coming spring, why not congratulate every one of these foreign-born students who graduates with the gift of a new H-1B visa?
A POLITICAL WINNER
Given how politically divisive immigration is in the United States, any plan to expand visa programs may seem unrealistic. Critics will inevitably ask how the United States can consider admitting more foreigners when it appears to have lost control of its borders.
But the flow of migrants across the U.S.-Mexican border is hardly unrestrained. Although the U.S. Border Patrol apprehended or expelled a record number of migrants in 2021 and 2022, these numbers give a highly misleading impression of how many people are actually entering the country. In the 2022 fiscal year, for instance, the Border Patrol recorded 2.4 million “encounters” on the U.S.-Mexican border. But of these, 1.1 million resulted in the deportation of migrants to Mexico under Title 42, a provision that the United States has used to summarily expel migrants during the pandemic. Ironically, because Title 42 expulsions leave no record of an entry attempt—and therefore no legal repercussion that might prevent a migrant from trying to cross the border again or even applying for a U.S. visa—its use may have encouraged migrants to rush to the border. The number of encounters therefore likely substantially exceeds the number of individual migrants who have attempted to cross into the United States and, by an even larger margin, the number who have succeeded. Expanding H-2B visas would create an alternative legal entry route.
Those Border Patrol encounters that did not result in expulsion (1.3 million of them in the 2022 fiscal year) largely involved migrants seeking asylum, which the United States grants to those with a credible fear of persecution at home. Some applicants are now in the United States awaiting immigration hearings, which are likely years away; many others have already been denied entry and remain abroad. In another irony, the United States’ success in impeding illegal entry has left asylum as the only viable option for many would-be migrants, probably contributing to the recent surge in asylum applications. For this reason, increasing the number of H-1B and H-2B visas could have the additional benefit of unburdening the asylum system.
Perhaps surprisingly, expanding immigration could also be a political winner. Most Americans are broadly supportive of immigration, although Democrats are more supportive than Republicans. In a national survey in July 2022, Gallup asked respondents, “On the whole, do you think immigration is a good thing or a bad thing for this country today?” Seventy percent said “a good thing.” This positive sentiment was widely shared by men (71 percent) and women (68 percent); across major age groups (especially the young—83 percent of those aged 18 to 34); and across all educational cohorts, even among those without any college education (64 percent). Republicans were close to evenly split on the question (46 percent said immigration was a good thing and 45 percent said it was a bad thing), whereas large majorities of independents (75 percent) and Democrats (86 percent) had a positive view. But much of this partisan difference seems to stem from Republican worries about illegal immigration, not legal immigration through channels such as the H-1B and H-2B visa programs.
Support for allowing highly skilled immigrants to enter the United States is even greater and more bipartisan. An August 2022 survey by the Economic Innovation Group found that 71 percent of registered U.S. voters supported more skilled immigrants coming to the country—including 83 percent of Democrats, 60 percent of Republicans, and 72 percent of independents. And a majority of Americans from both parties—82 percent of Republicans and 78 percent of Democrats—said that immigration reform should be a top priority in the next 12 months. Expanding the H-1B and H-2B visa programs should be at the center of any such reform.
EVERY TOOL IN THE TOOLKIT
The sharp increase in inflation and its stubborn persistence have commanded the attention of economic policymakers worldwide. Although there is little agreement over who is to blame, there is widespread acceptance that central bankers will be the ones to slow price increases now. Yet just as the pandemic has exposed new vulnerabilities in the labor market, it has highlighted the need for more expansive policy solutions to resolve supply bottlenecks and labor shortages.
Immigration policy should be part of the anti-inflation toolkit. Expanding the H-1B and H-2B visa programs would immediately ease U.S. labor shortages, which make it more costly to produce goods and provide services—cost increases that companies pass on to consumers in the form of higher prices. The exact extent to which this dynamic is driving the current inflationary trend is difficult to quantify, but there is no question that it is playing a major role and that addressing labor shortages would help. The U.S. government needs to fight inflation with everything it has. More immigration can be part of the solution—if policymakers let it
