Immigration Cannot Significantly Reduce Inflation

Of note. Many of the arguments also apply to the Canadian context:

Many immigration advocates have recently called for increasing the number of immigrants allowed into the country to fill lower-wage jobs in order to decrease wages by increasing the supply of workers, thereby lessening inflation. In this post, we attempt to roughly estimate the possible impact of immigration-induced reductions in wages on consumer prices. We focus our analysis on the lower-wage sectors of the economy that primarily employ workers without a bachelor’s degree (the less-educated) because many of those advocating for more immigration have specifically called for more workers in these sectors. Our analysis shows that reducing wages for the less-educated is not an effective means of controlling inflation because such workers earn relatively little and as a result account for only a modest share of economic output. There is also the equally important question of whether reducing the wages of workers who are the lowest-paid is sound public policy.

Among our findings:

  • Reflecting their relatively modest average compensation, workers without a bachelor’s degree account for an estimated 25 percent of GDP. This means that even a substantial reduction of 10 percent in their wages could likely reduce consumer prices by only an estimated 2.5 percent. More educated workers and capital account for most of the economy.
  • If we look at just lower-wage occupations done primarily by those without a bachelor’s degree, we find that they account for only 22 percent of GDP. As a result, a 10 percent reduction in wages in these occupations could reduce prices by only an estimated 2.2 percent.1
  • It might be possible to reduce wages in specific occupations by dramatically increasing the number of workers in relatively few occupations. But since individual lower-paid occupations account for only a tiny share of the economy, the impact on overall consumer prices would be correspondently tiny. For example, the compensation earned by construction and extraction workers is only 2.2 percent of GDP, for cleaning and maintenance it is 1 percent, for food preparation and serving it is 1.1 percent, and for healthcare support it is 0.9 percent.
  • Prior to Covid, workers, including those without a bachelor’s degree, have generally seen their wages decline or grow very little for more than two decades, so reducing their wages by admitting more immigrants can be seen as unfair and unwise.
  • More than one in seven of these less-educated workers are currently eligible to receive cash payments from the Earned Income Tax Credit and Additional Child tax Credit — the nation’s largest cash assistance programs for low-wage workers. Reducing the wages of such workers could undo some of these important efforts to help low-income workers.
  • Nearly two-thirds of all children in poverty in America are dependent on a worker who does not have a bachelor’s degree. Using immigration to reduce wages for less-educated workers has significant negative implications for American’s low-income children.

Source: Immigration Cannot Significantly Reduce Inflation

About Andrew
Andrew blogs and tweets public policy issues, particularly the relationship between the political and bureaucratic levels, citizenship and multiculturalism. His latest book, Policy Arrogance or Innocent Bias, recounts his experience as a senior public servant in this area.

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