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In October 2022, Federal Reserve officials and business leaders got together at an event organized by the Minneapolis and Kansas City Feds to talk about rising costs of food processing, transportation, and labor. They ended up talking about immigration policy.
“You recognize the number of acres that don’t get planted or harvested because there is no labor,” Land O’Lakes CEO Beth Ford said at the event. “We have got to get labor, especially at the farm level. … We are a couple million workers short.”
The missing workers Ford was referring to are, to a large degree, immigrants: 55 percent of hired U.S. farm laborers were born outside the United States. “It’s why I push pretty strongly [that] we must get some immigration reform,” Ford said.
Between 2011 and 2016, annual net international migration (that’s the movement of people into and out of the United States) was trending up slowly, reaching 1.1 million in 2016. Then the trend reversed; by 2021, it was just 245,000.
Just how many people didn’t come (or didn’t stay)? In 2017, the Census Bureau released a population projection that estimated the United States would continue to add about 1 million immigrants a year on net (see figure). Adding up the difference each year between actual immigration (green bars) and those projections (gold bars) is one way to estimate the immigrant shortfall: The United States is missing about 2 million immigrants.
Given the agriculture sector’s reliance on foreign-born workers, it’s not a surprise it has struggled to find labor after five years of declining immigration. But the consequences of the missing immigrants extend far beyond the impact on labor supply. Immigrants are workers, entrepreneurs, students, taxpayers—in these ways and more, they contribute to economic opportunity and growth in the United States.
“When I think about the one thing we could do as a country that could really boost our economic competitiveness, it is fixing our immigration system,” Minneapolis Fed President Neel Kashkari said at a November 2022 event. “That is the single biggest thing I’m aware of that is within our control that could really move the needle on our economy’s potential.”
Who didn’t come? Why didn’t they come?
One obvious explanation for the immigration slowdown is that countries around the world halted travel in response to the COVID-19 pandemic.
But it’s not the only explanation. Immigration to the United States started falling three years before the arrival of the coronavirus, a result of policy changes that added complexity to immigration processing and, indirectly, the perception of the United States as a welcoming destination. One of the most significant changes was the expansion of the “public charge rule” that required visa applicants to demonstrate they would not become dependent on government benefits, a subjective determination based on factors such as income, assets, debt, health insurance, and any past benefit receipts. Applications became even more burdensome as a result. Denial rates and requests for additional evidence on applications also increased—even for visa renewals. Processing times slowed.
The interaction of a global pandemic with these changes had the predictable effect of depressing immigration even more.
Data from the U.S. Census Bureau’s Current Population Survey show a 3.7 percent decline in the nation’s non-citizen, foreign-born population between 2016 and 2021. That decline, however, was not spread evenly across the age distribution: It was concentrated among those between the ages of 20 and 39. The percent of the foreign-born population that was 55 and over, meanwhile, increased during this time. Put differently, recent events appear to have had a chilling effect on a number of young adults who otherwise would have immigrated to the United States.
Fewer immigrants, more unfilled jobs
Perhaps the most predictable and direct consequence of the immigrant shortfall was its contribution to the labor shortage. During the pandemic, “net migration into the U.S. basically fell to zero,” Dallas Fed vice president and former Institute System affiliate Pia Orrenius observed. “That’s unprecedented. And of course if the recession had lasted all year, that would not have been a problem. But the recession lasted only two months. And so we came out of recession and there was a huge spike in labor demand and everybody wanted to hire.”
Of the 2 million “missing” immigrants, approximately 1.2 million of them would have been in the labor force, based on the age profile and labor force participation rate of the foreign-born population. That comes to about 40 percent of the average monthly labor force shortfall in 2022.
Some sectors have felt this shortage more acutely than others. University of California, Davis, economists Giovanni Peri and Reem Zaiour find a positive correlation between the share of an industry’s workforce that is foreign-born and its rate of unfilled jobs in 2021. This is particularly evident in the food and hospitality sector, which saw the largest decline in foreign-born employment and had the largest number of job vacancies in 2022, and in the health care and social assistance sector, which employed fewer immigrants in July 2022 than it did in February 2020.
Another way that immigrants contribute to the healthy functioning of the U.S. economy, particularly in times of economic turmoil, is via their mobility. Immigrants tend to settle in fast-growing areas with rising wages and job opportunities. And if the economic winds shift, they are more likely than U.S.-born individuals to relocate to an area with more opportunity. This mobility facilitates economic growth by helping labor and other resources needed for production get to where they are most needed. Indeed, employment among foreign-born workers has been evolving quickly over the last few years of economic upheaval. After a steep decline in 2020, it has recovered to its pre-pandemic trend.
The labor crunch spillover: Inflation
Might these sectoral labor shortages have contributed to inflation, a pain felt by all Americans? It’s too early for rigorous economic analysis of such recent events, but there’s reason to think so, by pressuring wages and disrupting supply chains.
“I think absolutely there’s a connection there,” Orrenius said. “The spike in labor costs has many sources and immigration may not be the number one source, but these bottlenecks in labor markets and the constraints that they’ve placed on the supply chain I think have been an important factor in inflation.”
Research suggests there can indeed be a relationship between immigration levels and prices. In a study published in 2008, Boston University economist Patricia Cortés analyzed the relationship between the share of a city’s workforce who are immigrants without a high school degree and the price for services with a high proportion of immigrant workers, such as housekeeping, gardening, child care, and dry cleaning. She finds that a 10 percent increase in the share of this immigrant population in a city’s labor force resulted in a 2 percent decrease in prices for those services. While her study analyzed a particular group of immigrants and particular prices, it suggests that the recent large shock to immigration—a 50 percent reduction from 2020 to 2021—could significantly impact prices in certain sectors.
New ideas, taking risks
Immigrants’ role in the U.S. economy extends beyond their labor in many ways. They are also innovators and entrepreneurs, contributing disproportionately to these high-value economic activities. Of the companies that made the Forbes 500 list in 2020, 20 percent were founded by immigrants and another 24 percent were founded by the children of immigrants, according to the New America Foundation. These companies had a combined revenue of $6.3 trillion and employed 13.7 million people.
Research shows that immigrants contribute to small and medium-size businesses too: Between 2008 and 2012, immigrants made up about 13 percent of the U.S. population but started about 25 percent of all new firms, which are drivers of job creation, providing opportunities to all workers. Indeed, immigrants are nearly 80 percent more likely to start a new business than U.S.-born individuals. These immigrant-founded firms are more productive and more likely to hold a patent than firms with U.S.-born founders.
Immigrants also contribute in important ways to innovation. New research finds that between 1976 and 2012, 16 percent of all U.S.-based inventors were immigrants who came to the United States at the age of 20 or after. These immigrant inventors produced 23 percent of all patents granted during this period. Even when immigrants aren’t company founders, research suggests that firms that increase their number of foreign-born workers on H-1B visas introduce more new products and have higher revenues than other firms.
More broadly, immigrants contribute to the U.S. economy by complementing the U.S.-born workforce. “The big picture is that immigrants tend to have different skill sets than U.S.-born people, on average. When you get people with different skill sets working together, they can more easily specialize,” explained Tara Watson, economist at Williams College and fellow at the Brookings Institution. “You get a situation where people are making the most use of the skills that they have, and that leads to productivity gains.”
This is not an argument that U.S.-born individuals are less inherently entrepreneurial, innovative, or productive than natives of other countries; rather, immigrants are a highly selected group of individuals. Research by Harvard Business School economist William R. Kerr has found that around the world, more talented individuals are more likely to emigrate—and as migrants’ talent level rises, so does their preference for moving to the United States. America’s beacon has delivered economic good fortune.
A financial blow
When asked about potential consequences of the decline in immigration, University of Oregon economist and former Institute visiting scholar Mark Colas mentioned one that hits close to home for him: the effect on universities. “We’ve seen a huge decline in mostly Chinese students,” Colas said, due to factors both in the United States and in China. “I think financially that has affected the university quite a bit.”
Between 1980 and 2017, foreign-born students’ share of U.S. college and university enrollment doubled, from 2.5 percent to 5.1 percent. At the top 150 or so universities with the highest research output, the share is considerably higher, around 11 percent. According to a recent paper in the American Economic Journal, the growth in foreign student enrollment was partly due to the response of higher education institutions to substantial declines in state funding, and today foreign students are an important source of revenue for many colleges and universities.
Paralleling immigration trends as a whole, the number of foreign-born students at U.S. colleges started to decline in 2017; as of 2022, it was down about 20 percent. The impact of international students goes beyond the tuition they pay to universities, however, as student visas are a key pathway through which foreign-born individuals enter the U.S. labor market. A recent Philadelphia Fed working paper studied the founders of around 30,000 venture capital–backed firms, which tend to be particularly large and innovative. About 20 percent of these firms have immigrant founders, and more than three-quarters of those immigrant entrepreneurs first came to the United States for education. Other research has found that around 1 in 5 international students will work in the United States for at least a few years.
As students, immigrants participate in their local economies as consumers and taxpayers—as most immigrants do. Like U.S.-born individuals, foreign-born individuals are net consumers of government expenditures when they are young (not working, receiving education) and when they are old (not working, receiving health care). According to analysis by the National Academies of Sciences, Engineering, and Medicine, the average net fiscal impact of a foreign-born person is positive from around ages 25 to 65, roughly $10,000 a year. If the recent decline in the foreign-born population occurred primarily in this prime-age group, as appears to be the case, then “in the short term that’s probably a big fiscal loss,” said Colas, who has studied the fiscal impact of immigration.
Immigration today, impact tomorrow
The short-term effects of the missing immigrants may get the headlines, but there could be long-term consequences as well. It’s not easy to estimate the impact of immigration 100 years down the road, but an innovative analysis shows U.S. counties that had higher levels of immigration between 1850 and 1920 today have higher incomes, less poverty, less unemployment, and greater educational attainment than counties that had less immigration. “Every indicator we looked at in the short run and long run was higher,” with the exception of years of formal education in the short run, said Nancy Qian, an author of the study and an economist at Northwestern University.
Qian is also studying the long-term impact of limiting immigration. In a new working paper, she and co-authors investigate the consequences of the Chinese Exclusion Act, which banned Chinese immigration after 1882 and was not repealed until 1943. The economic effects were deep, broad, and long lasting: Income, productivity, innovation, and firm investment all declined, effects that persisted until at least 1940. Their results offer further evidence that foreign-born workers complement rather than replace U.S.-born workers, helping to grow the economy for everyone.
There is another important long-term consequence of reduced immigration: It will slow U.S. population growth. And that’s a problem.
The amount of immigration between 2020 and 2060 could change the U.S. population by as much as 127 million, according to projections by the U.S. Census Bureau. Without immigration, the U.S. population will start to decline in just 15 years. New arrivals as well as their children play a role here, as immigrants have more children on average than the U.S.-born population.
There is, of course, a close connection between population growth and labor force growth. Since 2000, immigrants account for 45 percent of the labor force growth, according to the Dallas Fed’s Orrenius. More recently, immigration appears to be the only source of growth, a trend that is likely to continue, Orrenius said.
This is important because labor force growth is an essential ingredient for economic growth. “We won’t be able to function well as a society or take care of our elderly by 2040 without sustaining significant immigration going forward,” Watson of Williams College said.
A long road
While the executive branch modifies immigration rules regularly, the last major piece of legislation on immigration passed by Congress was in 1990. It established the H-1B visa, a non-immigrant employment visa for college-educated workers, and set the maximum number at 65,000 per year. Today’s cap? Still 65,000. (An additional 20,000 are granted to foreign nationals with a master’s degree or Ph.D. from a U.S. institution.) This stasis persists despite the fact that demand is high: For fiscal year 2023, some 48,000 U.S. companies submitted more than 480,000 requests to an initial lottery for the opportunity to submit an H-1B application.
In the absence of congressional legislation, executive action has played a large role in shaping immigration policy. This leads to heightened uncertainty no matter who is in office, as U.S. presidents have term limits and their actions aren’t subject to the same negotiation and compromise of congressional legislation.
“The U.S. I think is still seen as a safe haven even when the rhetoric is at its worst,” Watson said. “People who have ties already in the U.S. are also less likely to be deterred by the anti-immigrant policies or rhetoric.”
But for immigrants who are moving for opportunity and do not have strong ties, the political environment could make an impact. “Our system was never ‘user friendly’ … but talented people were willing to make the investment for the strong opportunities here that they could ultimately secure. The uncertainty of the last six or so years has undercut that,” said Harvard Business School economist William Kerr. Indeed, between 2016 and 2019—before the pandemic—applications for U.S. permanent residence fell by 17 percent, while applications for permanent residency in Canada from non-citizens living in the United States increased 128 percent.
There’s also the potential that the lack of immigrants between 2017 and 2021 will weaken the networks that pull in new immigrants, Watson pointed out. If that happens, the immigrant shortfall of the past few years could have long-run impacts.
The magazine of the opportunity & Inclusive Growth institute
Only time will tell. In 2022, the U.S. Citizenship and Immigration Service granted more employment-based immigrant visas than in any year since at least 1993. How quickly immigrant flows can slow and then resume is perhaps one of the key lessons from recent trends. This responsiveness offers optimism that the impact of the five-year decline in immigration may be relatively short-lived. However, such volatility also makes it difficult to make predictions about what will happen in the future. Labor force growth, entrepreneurship, higher education, fiscal receipts—the many and varied ways that immigrants contribute to economic opportunity and growth—all become more uncertain in a future in which immigrants may or may not come.
Natalie Gubbay provided research assistance for this article.
This article is featured in the Spring 2023 issue of For All, the magazine of the Opportunity & Inclusive Growth Institute
Lisa Camner McKay is a senior writer with the Opportunity & Inclusive Growth Institute at the Minneapolis Fed. In this role, she creates content for diverse audiences in support of the Institute’s policy and research work.
