Why the US economy needs more immigrants

Why the US economy needs more immigrants

A recent surge in immigration to the United States, projected to continue through 2026, is expected to have a significant impact on the nation’s economy, labor market, and housing sector.

The Congressional Budget Office (CBO) recently released updated projections on the US economy, factoring in a surge in immigration that began in 2022 and is expected to continue through 2026. This increased influx of people is anticipated to have a significant impact on the US economy and labor force.

Expanding Labor Force and Economic Growth

The CBO projects a continued rise in net immigration through 2026, contributing to a larger and younger workforce. This influx of immigrants, primarily in their prime working years (25-54 years old), is expected to offset the decline in labor force participation due to an aging population. Consequently, the CBO forecasts a moderate expansion in the workforce through 2026.

This expansion in the labor force is expected to translate into increased economic output. The CBO estimates that the rise in immigration will add an average of 0.2 percentage points annually to the real Gross Domestic Product (GDP) growth rate between 2024 and 2034. This translates to a projected increase in real GDP of around 2% in 2034 compared to a scenario without significant immigration growth.

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Impact on Wages and Productivity

While increased immigration is projected to benefit economic growth, the CBO report has also acknowledged potential downsides for average real wages. New immigrants are likely to initially work in sectors with lower wages, putting downward pressure on average wages across the board. Also, the increased workforce reduces capital per worker, further affecting wages. However, these effects are expected to diminish over time as immigrants gain skills and integrate further into the labor market.

The CBO also foresees a long-term positive impact on productivity from the projected increase in immigration. Roughly 2% of the additional immigrants are expected to be highly skilled workers in science, technology, engineering, and math (STEM) fields. These workers are projected to contribute to innovation and boost total factor productivity (TFP), potentially outweighing the short-term negative effects by 2027.

Impact on the Housing Market

The CBO predicts a significant rise in residential investment due to the increased demand for housing associated with the growing population. They project average annual growth in real residential investment to jump to 10.8% in 2025 and 2026, primarily driven by declining mortgage interest rates and housing needs.

While net immigration is expected to slow down after 2024, its impact on housing is likely to persist into the second half of the 2020s as newly arrived immigrants gradually form their own households. Consequently, the CBO projects a sustained level of housing construction activity in the coming years.

Population Projections and Labor Force Participation

The CBO has revised its population projections due to the anticipated increase in net immigration. The civilian population aged 16 or older in 2033 is now projected to be 7.4 million people larger than previously estimated, with most of this rise attributed to immigration. The projected labor force participation rate is also revised upwards, reflecting the larger share of individuals in the prime working age group (25-54) due to increased immigration.

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Immigration and the US Elections

Immigration has already emerged as a major polarizing issue in the 2024 US presidential election.

While illegal immigration at the border has always been a bigger target for politicians – arrests for illegal border crossings from Mexico reached an all-time high in December 2023 – Donald Trump has laid out a plan to curb legal migration into the country too, if voted back to power.

In May last year, Trump announced his intention to pursue the removal of automatic citizenship for children born in the United States to illegal immigrants—a proposal he had previously raised as president. A legal challenge would probably follow such an action, which would be in opposition to the long-standing interpretation of an amendment to the U.S. Constitution.

“A merit-based immigration system that protects American labor and promotes American values” is what Trump has pledged to pursue. During the COVID-19 pandemic, he suspended numerous work visas and implemented measures to restrict access to certain visa programs during his first time in office.

For more news like this visit The Economic Times.