This is an audio transcript of the Unhedged podcast episode: ‘Immigration and unemployment’

Robert Armstrong
Last week at his big press conference, Jay Powell, chair of the Federal Reserve, was asked about the number of jobs being created in the United States. It’s around 100,000 a month. In theory, that is below replacement rate, meaning that it suggests that unemployment will be rising.

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He said this: It depends on the inflows. If you’re having millions of people come into the labour force and you are creating 100,000 jobs, you’re going to see unemployment go up.

Today on the show: immigration, the labour market, the Fed and the economy. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong. I’m coming to you from Unhedged world headquarters in beautiful New York City, where I’m joined by Aiden Reiter.

Aiden Reiter
Good morning.

Robert Armstrong
My colleague on writing the Unhedged newsletter. Aiden, is Powell right that part of the reason or a lot of the reason that the unemployment rate is going up is that we have a lot of people coming into the country from the outside?

Aiden Reiter
So he’s directionally right, but it might be a bit of an overstatement.

Robert Armstrong
Yes. That, on Wall Street, directionally right is how we say wrong, I think. So you agree basically.

Aiden Reiter
Basically, yes.

Robert Armstrong
OK.

Aiden Reiter
But we talked to some really smart people . . . 

Robert Armstrong
OK. But it seems like . . . Wait, let’s not get to the smart people. Let’s just have the two stupid people in this room talk for a second. The unemployment rate is a fraction. It’s the number of people who are unemployed, divided by the number of people in the workforce.

Aiden Reiter
So the equation for unemployment is people in the economy who are searching for a job and cannot find a job. And that has its own weird quirks ‘cause say you don’t have a job because you gave up looking, you might not be included. But yeah. So it’s people looking for a job who don’t have a job divided by the entire working age population, which is around 170mn.

Robert Armstrong
Powell’s point seems quite straightforward. People come in the country, workforce gets bigger. Denominator gets larger, unemployment rate goes up. What’s so hard?

Aiden Reiter
Yes, that’s technically right. But they’re not just in the denominator. So a lot of migrants come into this country, get jobs and they work. So if they are increasing the unemployment rate, it’s probably only by a little bit.

Robert Armstrong
OK. I’m with you that far. And is it possible they also increase demand, which makes other people get hired? Is that part of the equation? Like they come in and they buy tons of stuff and . . . 

Aiden Reiter
They’re coming in, they’re buying food, they’re going to the grocery stores.

Robert Armstrong
Those people need to be served.

Aiden Reiter
Exactly. So yes, they also increase aggregate demand and aggregate goods in the economy.

Robert Armstrong
I think this is why in general, economists tend to be positive on immigration, at least in the case of the United States. Cheap labour in a tightish labour market is a good thing. And more demand is a good thing. And so it’s kind of positive. But I wanna get in the weeds a bit on this because we now have to measure three things that are kind of complicated to measure. At least three. Let’s start with how many people are coming into the country. We need to measure that. Then we need to measure how many of them are employed and how many of them are unemployed. And then we need to measure everybody else so that we know what the context is. Can we measure these things very accurately?

Aiden Reiter
Well, it’s a pretty tough task. Undocumented immigrants are undocumented by their very nature, right, so it’s hard to get a big picture and a good picture of how many people are coming across the border and how they’re working and what they’re doing in the economy. But we have some pretty good estimates that we can use for some of those questions you ask.

Robert Armstrong
OK. Give me one of them.

Aiden Reiter
You know, again, this is backwards-looking data, but the Congressional Budget Office had projected there to be 1mn new migrants in 2023 back when they did their demographic outlook in 2019. They upgraded that number to 3.3mn last year. They said we got an extra 2.3mn people than we otherwise would have in 2023. That’s a huge surge.

Robert Armstrong
Yeah. And how big is the workforce? Remind me just so we can . . . 

Aiden Reiter
It’s just under 170mn. And we should note that’s not everybody who’s of working age. That’s people who are working age and want to work.

Robert Armstrong
So you have an addition of three over 170. So that’s increasing the labour potential, potentially increasing the labour force by a couple of per cent. I mean, it’s not trivial.

Aiden Reiter
It’s not. Yeah, it’s absolutely part of the picture. But keep in mind that those people are also working so they get put into a numerator, some of them. It’s kind of hard to tell anecdotally and from some research studies that people have done, it seems like the foreign-born population that has come in in the past two years has a slightly lower employment rate than people who are already here. So, yes, they are directionally increasing the unemployment rate. But again, it’s not by that much. And think about how large that denominator is of the population.

Robert Armstrong
You wrote on this a few days ago. And I remember one thing that really struck me is that the main tools that we use to measure this sort of thing are these surveys. We have what they call the household survey and the establishment survey. So you ask households and you ask employers. How many people do you employ? Are you employing more? Do you have a job? Do you not have a job? Neither of these surveys asks you, Are you an immigrant? Are you in this country legally, illegally? Do you have a work permit? Do your workers have work permits? So it’s like there is not a primary source of information within the data the Fed is looking at to answer this question.

Aiden Reiter
Yeah, there are other surveys like census surveys that capture that, but again, it’s not direct and that’s not what the Fed uses. There are some of those surveys that ask whether employees or somebody is foreign-born versus US-born, but people often lie on those. There’s no, you know, an employer will lie because he’s afraid that oh, I’ve hired too many foreign migrants who might be illegal, even though technically, you know, Immigration and Customs Enforcement is not supposed to penalise employers through those surveys, people will still not accurately report.

Robert Armstrong
I mean, talk to somebody who runs a restaurant. This is a constant anxiety for them. What do I tell? Who do I tell who’s working for me? You know, it’s an issue for employers.

Aiden Reiter
Yeah. So we don’t have a great picture of what is the actual population that’s immigration-driven. But there are a couple of things we can say with the numbers we do have. So right, we know there’s been this huge upsurge. And part of what that upsurge we think is in large part due to is people coming over undocumented over the border. There’s been a record amount of encounters at the border. So between border enforcement and people trying to flee and come to this country. So that anecdotally tells us there’s a lot more people coming in.

Robert Armstrong
I wanna stop on that point for one second. One thing several of the economists we’ve spoken to recently, the sort of topic du jour is how beautifully inflation has come down from its peaks of a few years ago. And more than one has mentioned, of those economists have mentioned to us that they think part of the reason for this happy outcome is that the labour market cooled because there’s more workers because people are streaming across the border.

Aiden Reiter
Yeah, absolutely. So say you have a hot economy like the US has been. Aggregate demand is high after a couple of years of people sitting on those savings. They’ve demanded a lot of goods and services. You need people to do that. Now, if you’re trying to battle inflation, the last thing you want is there to be wage competition because that just makes everything go up (inaudible).

Robert Armstrong
Everybody demands. It’s the classic wage-price spiral. There is not enough workers. It’s a bidding war for workers. They demand more wages. The wages go up so prices have to go up and it keeps going. That didn’t happen.

Aiden Reiter
That didn’t happen. And a lot of economists believe it’s because this workforce came in that had not been here before, that weren’t looking for jobs at the time. And they came in and they said, hey, we’re gonna power this economy, essentially.

Robert Armstrong
Now, I wanna mention now, but I don’t necessarily wanna talk about it because we try to avoid politics on this show, that this is the kind of political point of pain. How do you wanna characterise the fact that the labour market cooled in part because immigrants came in? Do you wanna say somebody is stealing somebody else’s job? Do you wanna say, do you know what I mean? Like wouldn’t, don’t we want higher wages for workers? Does immigration mean that’s not happening? I’m just, we’re just boring finance people who try to avoid politics, but we should at least flag we’ve reached the point of political tension.

Aiden Reiter
Yeah, and it’s complicated, right? I completely understand people who say, you know, if you have a workforce that, you know, doesn’t have great negotiating rights because they’re undocumented, they can be, you know, put in bad conditions and they can be given bad wages. And then that makes it harder for a US-born person. That’s definitely a part of this equation. But at the end of the day, if it had not been for those workers, it’s very possible that inflation would have resurged and we also would have potentially faced a recession of some kind.

Robert Armstrong
Yeah, because the Fed would have been forced to raise rates. And then we have a recession because rates are held too high for too long and then more people get fired. We’re not shooting at a stationary target here, right? We’re like in disequilibrium and we’re kind of stumbling our way to some kind of new labour market equilibrium.

Aiden Reiter
Yeah, And on the labour market equilibrium, one of the interesting things that came out in our conversations is that, you know, previously the CBO estimates and a lot of people have been working with the assumption that the break-even level of employment, right, the amount of new jobs you need to create because of new people entering the workforce at a natural pace in order to keep unemployment rate right steady. They had thought between 120,000 and 150,000 jobs a month. It’s probably closer to 230,000 based on some really great work by Wendy Edelberg at Brookings. It’s closer to 230,000. So remember a couple of months ago when we were like, oh wow, 250,000 jobs, new jobs a month. This is such a hot economy. Not really.

Robert Armstrong
Not really. 250,000 jobs a month was a great number of jobs for the smaller economy that existed before the surge in immigration. It’s not such a great number now that the economy is bigger, has more people coming in and more workers in it.

Aiden Reiter
Yeah. And it makes you know, the most recent reading, 89,000, look that much bigger.

Robert Armstrong
Yeah. So if the break-even rate of job additions, which again, this is the number of jobs that’s consistent with the economy just going along sideways, you know, not shrinking, if that’s over 200,000 and the last monthly reading is 89,000 jobs added, this is a pretty cold job market now. One month is just one month, as we love to say in Unhedged. We might be surprised by a high number, the number is volatile, etc, etc. But this strikes me as a very important point and might go a little way to explaining why we got that 50-basis-point cut to rates.

Aiden Reiter
It seems the Fed got hip to this.

Robert Armstrong
Yeah, they are looking at these job additions and saying, you know, we have 3mn more workers in this country. This is something we have to worry about.

Aiden Reiter
Yeah. You know, what’s hard about this whole thing is that it’s hard to measure immigration. It’s hard to measure employment among the foreign-born population. But what we can say is that this new information makes the most recent job additions number look that much weaker.

Robert Armstrong
It’s very interesting to speculate about this, and I wanna emphasise that I’m very much speculating at this point. I don’t know anything about this. But I wonder if because immigration is such a hot political issue — indeed, maybe the hottest of all political issues right now — that while the Fed has to think very carefully about the kind of complexities you’ve just been talking about, they’re careful not to talk too much about it. Powell did mention it in one sentence in his press conference.

Aiden Reiter
In a question answer, not even in his speech.

Robert Armstrong
Not even in his speech. And I wonder if they’re like, we’re supposed to be independent. We’re not supposed to meddle in politics. There’s this really important thing going in the jobs number. Let’s talk about it behind closed doors, but let’s just try to cool it on the public discussion because we’re gonna get drawn into a political fight where we really don’t belong.

Aiden Reiter
Yeah. And there’s also a lot of legal complexity here that I’m sure the Fed doesn’t want to touch with a 10-foot pole, right? So we’ve said, oh, there’s, you know, this huge surge in undocumented migrants coming over the border. Well, there’s also been an uptick in legal migrants. There’s this complexity here where if you are at the border and you request asylum and you’re given, you know, refugee status, etc, you actually are legally permitted to work. You just have a short-term work visa while you await for a court date. So he doesn’t wanna touch that. That’s politically contentious right now, both in the Biden-Harris administration and on the Trump campaign. So there’s a lot of things here that the Fed, I think, is correctly pointing out that they don’t want to get into because it’s not their jurisdiction.

Robert Armstrong
Yes. I wanna turn our discussion to the future a little bit here. So you wrote that the most recent data from Customs and Border Protection suggests this great surge of immigration is slowing.

Aiden Reiter
Yeah.

Robert Armstrong
So just thinking naively about that, we’ve had this kind of relief valve for inflation, meaning this kind of flow of people entering the workforce who keep wage pressure down. Do we need to worry about an inflation resurgence if that flow of people slows? What do we need to think about going forward about this as we try to anticipate what the unemployment rate and inflation is going to do?

Aiden Reiter
It’s a good question and just speculating here, but first, it’s worth noting that while those numbers are coming down and that’s a success, they’re still high by historical average. So there’s still people coming into this workforce. There’s also young people who turn 16 and enter the, you know, the working-age population. So the workforce is always growing and that’s just the nature of feeding this economy.

Robert Armstrong
Yeah. Or you better hope it is or else we’re Japan and you’ve got a whole different set of problems.

Aiden Reiter
Precisely. And so it’s a good problem to have especially in the past when we’ve had labour shortages. In terms of inflation, it’s really, really hard to say. If the economy were to stay hot and you don’t have enough labour coming in then yes, you could have an inflationary spiral. But our economy is cooling off to some degree. We’re in the soft landing stage. So if anything, we’ve actually set the ground to have more population in the future, right? If you’re a migrant population here then has kids or brings in their family, that brings in more people and eventually you have a larger base upon which to grow. So at least in the long term, this is probably good for the US long-term inflationary outlook. But in the short term, it’s very hard to say. It just depends on which direction the economy goes in a couple of months.

Robert Armstrong
If it wasn’t for the short term everything would be so easy.

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We’ll be right back with Long and Short.

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Listeners, we’re back. This is Long and Short, that portion of the show where we go long things we like and short things we don’t like. Aiden, do you have a long or short for us?

Aiden Reiter
I do. I am short Chinese market stimulus. So on Tuesday, it was announced that the People’s Bank of China has made this special fund facility for asset managers, investors, fund managers to buy stocks to try to buoy the long moribund Chinese stock market. 

Robert Armstrong
Yeah, long moribund hardly even covers it. And that stock market has been a disaster.

Aiden Reiter
It’s been bad.

Robert Armstrong
For a couple of years.

Aiden Reiter
They made a pool of about Rmb800bnn, that’s about $100bn, to give to asset managers and then also to give to companies to do stock buybacks to try to revive equities.

Robert Armstrong
So they’re like, here’s money. Buy stocks.

Aiden Reiter
Yeah. And then on top of that, they did a couple other, you know, monetary stimulus moves that would theoretically support more Chinese investors, retailers or, you know, other people putting their money in the stock market. I don’t think it’s gonna work.

Robert Armstrong
OK. That’s a strange thought, because generally if you give people money that they can only use to buy a thing, that thing gets bought.

Aiden Reiter
So while this might give a little bump to market, it’s not gonna help the economy for a couple reasons. A, the economy is still not doing great. You know, the housing market is terrible and that’s where most Chinese households put their assets. If that’s still terrible, they’re not gonna fix it. They’re not gonna put their money into the equity market.

Robert Armstrong
Yeah, they’re not confident.

Aiden Reiter
Yeah. There’s been some in this bond-buying surge where people have piled those bonds. They lowered rates the other day. That theoretically helps more people buy bonds, especially if you’re trying to make more liquidity. If there’s nobody borrowing because the economy’s not great, they’re not gonna go put that money in the market if they don’t wanna borrow.

Robert Armstrong
Yes. So the banks, you’re saying, will buy bonds because what else are they gonna do?

Aiden Reiter
What else are they gonna do? Even though the Chinese government isn’t very clear. They don’t want people to buy bonds. Same with households and same with, you know, any other business, right? So equities have gotten a little bit of a bump. But I think the monetary policy things they did on Tuesday are not enough to see a sustained surge.

Robert Armstrong
All right. I’ll take the other side and I will go long Chinese fiscal stimulus. I agree with you 100 per cent, Aiden, it is crazy to try to make the tail wag the dog by trying to stimulate the stock market in the hopes of giving the economy a boost. However, we have an announcement this morning, this very morning, reported in our own Financial Times that President Xi has pledged to issue and use government bonds to better implement, quote, the driving role of government investment. And this is something that people in general and Aiden Reiter in particular have been saying the Chinese government has the capacity to do and they need to do. The way out of this problem is to reject Mao, embrace Keynes and stimulate. So if President Xi is serious about this, this could be the start of something good for the Chinese economy.

Aiden Reiter
Yeah. And, you know, theoretically, the momentum of the stock market stimulus will ride off that. But we still have a lot to see, including they haven’t put numbers to that fiscal stimulus.

Robert Armstrong
I know. We’ve just got words, no numbers yet.

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On that happy note, join us next Tuesday when the next episode of Unhedged will be available in whatever strange place you get your podcasts.

Aiden Reiter
Usually ears, right?

Robert Armstrong
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.

FT premium subscribers can get the Unhedged newsletter for free, a 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.

I’m Rob Armstrong. Thanks for listening.

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