For Relief From Labor Shortages, Look to the Border

When higher pay results from higher worker productivity, it’s a good thing. But when employers must pay people more money to be no more productive, it can drive inflation higher. The gap between the number of jobs available and the number of people looking for work was the largest on record in March, and it has coincided with the biggest boost in nominal wages in more than three decades. Controlling for inflation, however, paychecks have grown smaller. What good are wage increases if prices are rising even faster?

This post-pandemic labor shortage has been driven by reckless government spending and misguided monetary policies that flooded the market with money. Covid relief measures—eviction bans, student-loan payment pauses, supplemental unemployment benefits—gave too many able-bodied workers an incentive to stay home rather than rejoin the labor force. The food-stamp work requirement was suspended in 2020, and the monthly benefit is now double what it was in 2019. The upshot is that there are more people on food stamps today than there were pre-Covid, even while the unemployment rate is close to a 50-year low and there are nearly twice as many job openings as people looking for work.

If President Biden and the Democrats who control Congress want to do something constructive about the labor shortage and its impact on inflation, they might turn their attention to our broken immigration system. Unauthorized immigration takes up most of the oxygen in this debate, but our system for admitting legal foreign workers is also in need of repair. A recent labor-market analysis by

Goldman Sachs

details the extent to which lower levels of legal immigration in recent years—stemming both from Covid and from the Trump administration’s more restrictive policies prior to the pandemic—have reduced the number of available workers.

“From 2010 to 2018, foreign-born workers accounted for nearly 60% of the growth in the U.S. labor force, but growth in the foreign-born population slowed to around 100k/yr between 2019 and 2021, leaving the U.S. population around 2 million smaller than it otherwise would have been, and the labor force around 1.6 million smaller,” the report finds.

Other research, by economists

Giovanni Peri

and

Reem Zaiour

of the University of California, Davis, estimates that the U.S. has about one million fewer college-educated immigrants than it would have had if pre-Covid trends had continued. Given that immigrants are more likely than natives to major in STEM fields and start businesses, the economists conclude, the “drop in the number of foreign students and high-skilled immigrants is particularly concerning for the long-run effects on productivity, innovation and entrepreneurship.”

The number of immigrants and temporary foreign workers allowed to come to America is limited by numerical caps that only Congress can adjust. Attempts to do that have failed repeatedly in recent decades, and they will likely continue to fail if serious border-security measures are not part of any package. Last year, Democrats tried to include immigration reform in their Build Back Better legislation, but it amounted to little more than a giant amnesty and would have made it harder to deport people who enter the country illegally and commit crimes. No wonder Republicans opposed it.

The U.S. labor shortage is primarily rooted in demographic trends. Large numbers of retiring baby boomers and low birthrates are a bad combination. Better immigration policy can help, but it won’t solve the problem entirely. Still, reforming legal immigration in a way that makes our labor markets more flexible could go a long way toward reducing the size of the undocumented population and addressing the needs of employers.

It’s true that some GOP lawmakers are immigration hard-liners who make no distinction between legal and illegal flows and want the border sealed to both. Many more Republicans, however, support legal immigration but see the current chaos on the border as a serious problem that can’t be ignored or wished away. Historically, buy-in from the latter group has been essential to making legislative progress. If the polling is correct, Democrats are poised to pay a price in November for their stewardship of the economy under Mr. Biden. Some appreciation of the importance of labor mobility in addressing labor shortages might help minimize the damage.