Immigration Rebound Helps Solve US Inflation Puzzle: Goldman Sachs

And immigration collapsed at the start of the pandemic. Wage growth and inflation consequently surged amid labor market tightness. However, the subsequent immigration surge brought these metrics down, Peng and Mericle wrote.

This sharp turnaround in immigration levels came when the U.S. labor market was exceptionally tight, particularly at the lower end of the wage spectrum.

From August 2021 to May 2022, wage growth in the leisure and hospitality sectors soared to double-digit rates. That starkly contrasts the sub-5% increases seen in the previous decade, reflecting a significant imbalance in labor demand and supply.

Shares of online marketplace for professional services such as Fiverr International Inc. FVRR and Upwork Inc. UPWK witnessed a staggering rally during phases of extreme pandemic-related labor market tightness.

Immigrant Influx Led To Labor Market Rebalance

Peng and Mericle argue that a large influx of mainly low-wage labor helped fill crucial gaps in industries with significant shortages, such as leisure and hospitality. This, in turn, helped stabilize extreme wage and price pressures in these sectors.

Using city- and state-level data, the economists found that immigration’s impact on wage growth is generally negligible when the labor market is balanced.

The impact becomes more pronounced in scenarios where large jobs-workers gaps exist, contributing to a decrease in wage growth by approximately 0.3 percentage points overall, and even more in sectors like leisure and hospitality.

“We find that immigration tends to raise local housing inflation but dampen inflation modestly in other categories. As with wage growth, the impact on inflation outside housing is more negative when the labor market is initially very tight,” economists wrote.

Looking ahead, U.S. immigration levels are expected to stabilize, with potential declines post-2024 depending on electoral outcomes. However, this normalization might not pose a significant risk to wage growth and inflation forecasts.

“The labor market now back in better balance,” making it less sensitive to fluctuations in immigration. Furthermore, “the inflation shocks of 2020-2022 amplified one another, meaning that any one of them occurring again today—including another drop-off in immigration—would have less impact in isolation.”

Despite potential moderation in immigration rates, the U.S. is anticipated to see immigration remain significantly above pre-pandemic trends in 2024.

This continued flow of immigrants is expected to positively impact job creation and GDP growth. Goldman Sachs projects that immigration could increase potential job growth by 50,000 to 125,000 per month. It can also raise short-term potential GDP growth between 0.25 and 2 percentage points.

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