Markets & Economy

From Pennsylvania Avenue to Main Street, immigration is a hot topic.

It is a multifaceted issue with economic, legal, and political ramifications. But for investors, what have the 28 million immigrants working in the US really meant for the economy and labor markets? Let’s take a look.

Understanding today’s labor market

The US currently faces a tight labor market. Unfilled jobs and a lack of qualified candidates are major concerns. More than a third of small business owners cite unfilled jobs as their single most important obstacle.

In order to compete for quality candidates when the labor market is tight, employers are incentivized to raise wages. Larger paychecks put more money in employees’ pockets, and we know a lot of workers have been itching for a raise lately.

Of course, there are two sides to every story. Higher wages can be problematic for stock market investors. All else being equal, high compensation expenses reduce corporate profit margins, and corporate profit growth is the most critical underlying factor of a rising stock market.

For some companies, a higher quality worker may mean a more productive worker. All companies want a more productive labor force that can produce more things for less money and less time. If wages rise and companies are able to do more with less, then this is a positive.

Often, higher wage expenses cause companies to pass higher prices on to consumers. This process of ever-higher wages leading to ever-higher prices, leading back to the need to raise wages again, creates inflation risk. If inflation begins to heat up, it may compel the Fed to further raise interest rates, potentially spooking financial markets and tipping the economy toward a recession.

The shaded recession indicators on the chart above demonstrate how a lack of qualified candidates (i.e., supply concerns) is not an uncommon late-cycle concern. Immigrants are by no means a panacea to employers’ supply woes, but they can provide slack in a tight labor market.

Immigration and the economy

At the most basic level, the size of the labor force is a key factor contributing to economic growth. It isn’t a coincidence that many of the world’s highest growth countries have fast-growing labor forces (India, Brazil), while regions with shrinking populations (Western Europe, Japan) are facing slower growth. Higher immigration rates can help offset slower or declining populations.

Along with the absolute number of workers, an economy’s growth potential is also a function of the quality of those workers. Workers with more education, better training, and superior skills increase the productive capacity of the economy more than lower-skilled workers. In this regard, highly-skilled immigrants can be helpful in supporting the economy, particularly if they are innovative.

For this reason, it is important that a country have an efficient process that encourages highly trained workers, and history shows that many immigrants are well-educated. They are more likely to be college graduates than the general population of US-born adults in 90 of the 100 largest metropolitan areas. Immigrants have been more likely to work in STEM fields (science, technology, engineering, and math), and to become Nobel laureates in physics, chemistry, and physiology (i.e., medicine).

Constructive immigration policies can also bring differing perspectives and skill sets that complement US worker abilities. This knowledge transfer can create a stronger and more diverse economy, and helps explain why more than a quarter of start-up founders were foreign-born, including a majority of Silicon Valley start-ups. Historically, immigrants obtain more patents than locals, and an increase in immigrants with college diplomas has been associated with an increase in patenting.

Despite the positive impact immigration can have a on a country’s economy as a whole, it can have consequences along the way, particularly among displaced US-born workers. In some cases, immigration can reduce wages and employment prospects, especially for lower-skilled workers. Policymakers need to be cognizant of potential negative outcomes and the ripple effect they may have on the broader economy.

A proactive approach

Changes in immigration policy can have enormous consequences on an economy. At Manning & Napier, we are always watching the legislative and political environments, and considering the risks that might arise from a given outcome. We will be paying close attention to immigration proposals and how they may impact the economy and labor markets. Regardless of where policies land on immigration, we will be prepared to adjust portfolios and manage risk accordingly.