Could Immigration Solve the US Worker Shortage?

31 MAY 2022

The biggest gap between job openings and available workers in postwar history is one of the key reasons that inflation is soaring in the U.S. A drop in immigration has helped push the gap wider, suggesting an increase in foreign-born workers could help contain the rise in wages and prices, according to Goldman Sachs Research.

As pandemic restrictions were lifted, labor demand recovered much more quickly than the labor force itself. As a result, wages jumped 5.5% during the past year, according to Goldman Sachs’ Wage Tracker. If this pace continues, the Federal Reserve would have a difficult time achieving its longer-run inflation goal of 2%. Labor participation is expected to pick up in the U.S., adding as many as 1.5 million workers over the coming year, but economists at Goldman Sachs predict that will leave a sizable jobs-workers gap of around 1 million.

Fed Chair Jerome Powell recently noted that the drop in foreign-born workers coming to the U.S. has rippled through the employment market. Immigration slowed in the U.S. between 2019 and 2021 amid the spread of COVID-19 and policy changes, leaving the labor force about 1.6 million workers smaller than it would have been if it had stayed on its pre-pandemic trend. And while green card issuance and temporary work visas have rebounded recently to roughly their previous levels, immigration rates would need to increase even more to make up for the shortfall, Goldman Sachs Research shows.

The COVID health crisis was part of the reason for the decline in immigration, but Trump administration policies, from visa bans to lower caps on refugees, also played a part. Under the new administration, the pace of immigration into the U.S. appears to have returned to what it was before the pandemic, according to Goldman Sachs Research, as temporary visas and green card issuance have rebounded, and the cap on refugees has been lifted. But even so, the population of foreign-born workers is smaller than it would have been without policy changes and the pandemic, and Congressional Budget Office estimates indicate the shortfall could increase.

It’s difficult to catch up because U.S. immigration law has numerical limits on many categories of visas. Broad bipartisan immigration reform appears out of reach, but smaller changes may have a chance, such as a bill for farm workers or other temporary jobs.

The Biden administration has some options that could increase immigration without approval from Congress, such as clearing the administrative backlog of interviews for visas (by waiving those interviews, for example), redeploying unused visas from previous years and allowing family members of certain types of visa holders to work.

Immigration is a top political concern in the U.S., but so is inflation. To get price increases back to the Fed’s 2% target, the jobs-workers gap in the U.S. needs to narrow by around 2.5 million, according to Goldman Sachs Research, and the expected increase in labor-force participation is well short of what appears to be required. It may be realistic to boost annual immigration by a few hundred thousand people — making a modest dent in the shortfall — but not by enough to close it.

When it comes to cooling the labor market, this suggests the Federal Reserve will have to do the heavy lifting by raising interest rates enough to slow the economy.

Explore More Insights