Immigration helps US jobs grow faster than Powell’s speed limit

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The US jobs market probably will be able to run significantly hotter again this year than Federal Reserve Chair Jerome Powell has reckoned is sustainable in the long run thanks to increased immigration.

At the heart of the issue is what’s known as neutral payrolls growth – a speed limit, of sorts, for how fast payrolls can grow without tightening the labor market and stoking wage pressures. Economists contend that immigration is boosting that monthly breakeven rate, which they estimate at anywhere from 160,000 to 265,000 this year.

That’s markedly higher than the roughly 100,000 pace Powell identified back in 2022 as the long-run cruising speed for jobs growth and compares with average monthly gains of 251,000 last year.

“We’re going to continue seeing really big employment numbers month after month through 2024,” said former Fed economist Wendy Edelberg, who’s now director of the Brookings Institution’s Hamilton Project. “That should not create consternation and hand-wringing that we have a way-too-hot labor market and that we’re never going to get inflation down.”

Payrolls are projected to have risen about 213,000 last month after expanding by 275,000 in February, according to the median forecast of economists surveyed by Bloomberg. Unemployment and year-over-year wage growth are seen easing, in March data to be released Friday.

A similar trend played out last year, in which job gains routinely topped estimates and pay gains moderated alongside inflation. Conventional wisdom would challenge that notion, but that’s where Powell and others credit immigration. Migrants have increased labor supply and typically fill lower-paying jobs, keeping aggregate wage measures tame.

Economists started rethinking their payrolls forecasts after the Congressional Budget Office more than doubled its estimate of immigration last year to 3.3 million people. It expects a similar-sized influx in 2024 and estimated in a February report that the rise in migrants will boost the economy by $7 trillion over the next decade.

The increase stems mainly from people entering the US illegally and from those released by customs officials with humanitarian parole or with a notice to appear before an immigration judge. Eventually, many of those migrants join the labor force.

Speaking at Stanford University on Wednesday, Powell said the increased inflow boosted US economic growth last year and helped to loosen a stretched labor market, while stressing that he was not commenting on immigration policy. He also said the central bank can be patient in assessing incoming data before cutting interest rates, consistent with prior comments that he and his colleagues have made.

Powell already seems to be tolerant of fast job creation, telling reporters last month that continued robust employment growth on its own wouldn’t prompt the Fed to hold off on interest-rate cuts. If policymakers understand the neutral rate to be higher, they may be more comfortable letting the labor market run at levels that they had previously deemed as potentially inflationary and unsustainable.

Political Uproar

The surge of migration has triggered a political maelstrom as states and municipalities have struggled to cope with the influx. It figures to be a major issue in the presidential election campaign: Donald Trump has blasted his successor for the upsurge, while President Joe Biden has blamed his presumed opponent for blocking congressional efforts to contain it.

At a meeting last week, CBO officials briefed economists from some of the nation’s biggest banks on the agency’s new immigration estimates. The 16 economists who make up the American Bankers Association’s Economic Advisory Committee have a consensus forecast of monthly payrolls growth of 139,000 this year, though they see the potential for a faster expansion due to higher immigration.

FHN Financial Chief Economist Chris Low said he came out of the meeting with the CBO thinking that neutral job growth is now likely at least 265,000 per month. How that will impact inflation is hard to judge, he said in a note to clients last week.

“A bigger labor force puts downward pressure on wages, which we have already seen in the data,” Low said. “It also puts upward pressure on prices, however, because more people are eating, driving and living here.”

Powell, for his part, has said that he judges the inflationary impact to be “broadly neutral.”

JPMorgan Chase & Co.’s Michael Feroli also boosted his estimate of underlying payroll growth, suggesting it’s now closer to 200,000 per month than 100,000. Ellen Zentner of Morgan Stanley upped her breakeven rate to 265,000 for this year and next.

Some Skepticism

Not all economists are buying into the narrative of a significantly higher cruising speed for employment growth.

While it is possible that immigration can boost the neutral rate of payrolls going forward, Bloomberg Chief US Economist Anna Wong doubts it’s much above 100,000 now. She also doesn’t think that immigration was the driving force behind last year’s job gains as many of those hires were for teachers, government employees and white-collar workers – not occupations that immigrants traditionally fill, she said.

Harvard University professor Jason Furman has seemingly little doubt about what’s at work. Asked on Bloomberg Radio on April 2 to explain the unexpected strength of the labor market, he replied, “One word: immigrants.”

“That has raised the pace of steady state job growth,” the former White House chief economist said.