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KC Fed Analysis: Migrants cooled overheated labor market, slowed wage growth

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The increase of migrant workers during the last two years cooled an overheated labor market and slowed wage growth across industries and states, according to an analysis of government statistics.

“The influx of immigrant workers appears to have helped alleviate the severe staffing shortages in certain industries that were pervasive during the pandemic’s volatile period,” Elior Cohen, an economist with the Federal Reserve Bank of Kansas City, wrote in the organization’s Economic Bulletin. It serves Colorado, Kansas, western Missouri, Nebraska, northern New Mexico, Oklahoma and Wyoming.

As pandemic guidelines ended and businesses reopened, immigration increased.

“As global travel restrictions from the COVID-19 pandemic eased, immigration rebounded sharply,” Cohen wrote. “By 2023, net international migration had not only recovered but surpassed its 2016 peak, reaching 1.14 million individuals according to data from the U.S. Census Bureau.”

Cohen’s research found immigrant workers increased nationally by approximately 2.5 million in 2022 and 1.5 million in 2023. He also noted lags in the release of Census data and other measurements might put the number as high as 3 million.

Large numbers of migrants filled vacant jobs, especially in the service sector.

“In the leisure and hospitality industry, for example, immigrant employment increased by more than 5.5 percentage points, while the job vacancy rate declined by a corresponding 4.4 percentage points,” Cohen wrote. “Industries with smaller increases in immigrant employment, such as public administrative and educational and health services, experienced a more moderate reduction in their job vacancy rates.”

As the number of available jobs decreased, wage growth began to slow. Using U.S. Labor statistics, Cohen determined wage growth slowed by approximately seven-tenths of a percentage point for every one percentage point increase in an industry’s immigrant population growth.

“At the industry level, sectors with some of the highest immigrant workforce growth, such as construction and manufacturing, saw the sharpest deceleration in wage growth (specifically, average hourly earnings) from 2021 to 2023,” Cohen wrote.

Cohen’s research found the relationships between immigration, job vacancies and wages often is consistent across states and industries.

“This result is consistent with previous work showing that lower immigration levels increased job vacancies and drove wage growth,” Cohen wrote. “However, the results … demonstrate that immigration has uneven effects across sectors and labor markets, suggesting outcomes from increased immigration may vary by industry and location.”