What is strange is that there is so little talk in policy circles of the one cure for a shortage of workers that keeps wages on a rising trajectory: immigration. The optimal way to put a lid on the US inflation is not to keep raising interest rates till it induces a recession strong enough to destroy demand, including for jobs, but to let more people from around the globe join the US workforce and let additional supply meet unmet demand.
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Why is the growth subdued in the services sector?
A simple search for labour shortage in the US will throw up stories of sector after sector being hit by a paucity of workers: healthcare, education, pre-school care, construction, ground-handling services at airports, retail, farms, hospitality, trucking, you name it. Shortages in trucking and rail services transparently add to inflation via disrupted, delayed supplies.
Labour force participation rates have been falling in the US since it hit a peak of 68% in 1997. It was at 63% pre-pandemic and the latest figure stands at 62.4%. The US has traditionally depended on seasonal migrants from south of the southern border for relatively low-skilled workers, and on retaining university students from abroad to fill skilled vacancies, apart from letting industry hire foreigners in the numbers it required.
Yet politics has persuaded the US to send back one million people who had been working in that country back to their native lands since 2009. Ever since Trump, stopping immigration into the US has become a major political cause for the Republicans. Therefore, easing immigration restrictions will not be politically easy.
Yet, the reality is that easier immigration will help the American economy grow, with lower prices. With a demographic transition underway that would, according to a Brookings paper, bring the number of Americans below 18 below that of Americans over 65 in about 12 years, the US needs to put in place a rational policy to increase the number of workers through immigration.
For the rest of the world, the short-term interest in the US letting in more foreign workers is the contribution this would make to easing wage pressures and hastening the taming of inflation. So long as the US Fed continues to raise policy rates, central banks around the world are under pressure to raise their own policy rates, to maintain the interest rate differential vis-à-vis the US, so that their currencies do not depreciate against the dollar more than they already have — the dollar index is up 19% from a year ago (the index measures the value of the dollar against a basket of six major currencies, the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona).
When currencies depreciate against the dollar, imports become more expensive in local currencies, importing inflation. Especially with volatile energy prices mostly denominated in the dollar, except for those still buying oil from Russia, depreciation against the dollar is a sure route for any country to higher domestic inflation. Further, when yields go up in the US, capital tends to flee other shores and crowd into the US gilts, accentuating the dollar’s appreciation, and pushing domestic stock prices down.
To avoid this fate, other countries raise rates to at least maintain their interest rate differential with the US. Higher rates and higher imported inflation are a recipe for lower growth, which, says the World Bank, is pushing the world into a recession.
More immigrants offer the best bet for the US to cool domestic inflation and stop ratcheting up policy rates; and for the rest of the world to avoid harming their own domestic economies by raising rates whenever the US Fed does.
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