Fed Weighs in on Economic Benefits of Immigration

As the Trump Administration begins implementing policies, Federal Reserve Chair Janet Yellen says that immigration restrictions will negatively affect the U.S. economy. Citing the need for labor inflow, Yellen told the Senate Banking Committee immigration is a critical component in sustaining a healthy economy.

Speaking to committee members in February, Democratic Sen. Catherine Cortez Masto of Nevada asked the chief central banker to comment on the economic impact of new Trump Administration policies, specifically those policies around immigration.

According to Business Insider, the senator asked Yellen about immigration restriction and immigrant deportation. Citing a Trump executive order calling for deportation of undocumented individuals who commit crimes, Sen. Masto asked Yellen to comment on activity from Immigration and Customs Enforcement (ICE) and to speculate on the economic fallout resulting from an immigration crackdown.

While Yellen pointedly avoiding direct comments on immigration policy, she did offer her personal insights on the important role immigration plays in the U.S. economy.

“Labor force growth has been slowing in the United States. It’s one of several reasons– along with slow productivity growth– for the fact that our economy has been growing at a slow pace.” Continuing the comment, “Immigration has been an important source of labor force growth. So slowing the pace of immigration probably would slow the growth rate of the economy,” she said.

Interestingly, economics professor John McLaren, of the University of Virginia, and Gihoon Hong, of the University of Indiana at South Bend published a study in 2015 that supports Yellen’s assertions. Very simply, McLaren and Hong centered their research on the presumption that an increase in labor supply necessarily creates a corresponding labor demand. In using U.S. Census data from 1980 to 2000, the researchers found each immigrant creates 1.2 local jobs for local workers, with most going to U.S.-born workers employed in service industries, referred to in the study as the non-tradeables sector.

“Immigrants appear to raise local non-tradeables sector wages and to attract native-born workers from elsewhere in the country,” according to the research summary.

Other study insights report that immigrants drive down wages in industries centered on the production of goods. However, the study also found that in service-sector jobs, immigration promotes wage increases.

Other reports say a crackdown on immigration– especially in terms of heavier deportation enforcement– would be particularly damaging to those areas of the economy dependent on low-wage employment, shrinking a tight labor market.

The perspective on immigration presented by Yellen and other economists contrasts to the point of view held by President Trump. As a candidate, a significant part of his platform centered on the notion that undocumented immigrants are a drag on the economy, and they drive down wages.

Yellen’s comments on immigration came as part of her semiannual testimony to Congress on monetary policy. Her testimony largely focused on her view that waiting too long to implement central bank interest rate hikes could cause the economy to go into recession. By adopting a slow but steady pace in raising interest rates, she said, the Federal Open Market Committee can avoid the kinds of market disruptions that come with rapid increases.