Inflation has fallen materially in the last two years, from a peak of 9.1 percent year-over-year in 2022 to around 3 percent last month. This isn’t because its 2021–2022 spike was just a blip caused by temporary supply-side constraints related to the pandemic and Russia’s invasion of Ukraine, as some economists claim. Nor is it because of record levels of legal and illegal immigration and the resulting increase in labor supply. By this logic, the border crisis would be responsible for our strong economy.
Yet many economists, including those at the Federal Reserve, have adopted the immigration-disinflation theory. Fed chair Jerome Powell, for example, has repeatedly argued that immigration contributes to slightly higher unemployment and lower wage growth, even as total economic growth has remained robust. The thinking goes that as migrants enter the labor market, they push down wages. This expands the labor supply and therefore lowers wage growth in the short term, which pushes down inflation.
This theory fails to acknowledge that inflation is the product of the interaction between supply and demand. While it’s true that immigrants entering the workforce boost the supply of goods and services, they also increase demand when they spend the money they earn. Immigrants may save more of their earnings than native-born workers do, usually to send remittances home, but the dollars they exchange for foreign currencies remain part of the U.S. money supply, generally winding up in someone else’s hands to spend.
Younger and particularly highly educated immigrants can be net fiscal contributors at the federal level. In fact, college-educated immigrants who come to America before their sixties are likely to pay more in taxes than they receive in government benefits of all forms over their lifetime. But this isn’t the case for older and less-educated immigrants—as many illegally crossing the border are—because they add to aggregate demand by consuming public resources and government benefits more than they pay in taxes. Pending research from the Manhattan Institute has found that the average immigrant with a high school diploma or less education exerts a net drain of approximately $50,000 on the federal budget compared with a native-born American and $300,000 in absolute terms over his life in America. While some recent illegal immigrants do pay taxes, that revenue does not cover the cost of the government benefits they get.
The problem is worse at the state and local levels. California recently made all illegal immigrants eligible for its state-funded Medi-Cal program. In New York City, the municipal government has spent billions housing more than 100,000 so-called asylum seekers in hotel rooms and tent cities; the city even distributed prepaid, refillable debit cards to migrants. These policies, whatever one’s opinion of them, increase government spending and thus aggregate demand, pushing prices higher.
When considering the merits of immigration policy, it’s important to remember that immigration does not affect all Americans equally. High levels of low-skill immigration tend to benefit wealthier and more highly educated Americans and hurt those with lower incomes and less educational attainment. Highly educated Americans can expect such immigrants to boost demand in industries like medicine, engineering, technology, and financial services. These immigrants also demand services from barbers, construction workers, and delivery drivers, but the benefits of that new demand for lower-income Americans’ services is outweighed by the competition these migrants present in the labor market. Low-education migration reduces poorer Americans’ real relative wages and expands income inequality.
These migrants also compete with lower-income Americans in the housing market. The overwhelming majority of recent arrivals seek apartments to rent, and housing supply cannot immediately expand to match the new demand. These forces drive housing prices higher in the short run, hurting renters and benefiting homeowners. This could help explain why long-term inflation expectations among lower-income households, who tend to rent, are nearly double those of higher-income households, who tend to own their homes. Their expectation of continued inflation can become a self-fulfilling prophecy given the role inflation expectations in setting prices, particularly wages. Indeed, persistent housing inflation is largely responsible for overall inflation remaining above the Fed’s target.
High-skilled legal immigration is a key driver of growth that we should defend. But most migrants crossing the border illegally are not highly skilled. The long-term economic implications of the surge in illegal immigration are debatable, but economists shouldn’t mislead Americans by suggesting that the bright side of the border crisis is lower inflation in the short term.
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