Worry About Inflation, Not Immigration

Inflation, labor shortages, and the migrant crisis have captivated the news cycle for most of 2021 and led to wavering debates over the severity of these problems and how best to resolve them. Lately, the attention has been on whether soaring inflation will erode the real earnings of the average American. That hasn't stopped some people from sounding off alarms on immigrants—whether at the border or on employment-based visas—for fear that increased labor competition will depress the wages of America's existing low-skilled workers.

How real are these concerns for the most vulnerable Americans? Should they be worried for their wallets due to increased inflation, immigration, or neither?

Inflation can act as a regressive tax if rising prices are centered on necessities and if workers in poorer bargaining positions are unable to obtain pay increases. When inflation was growing at about 2 percent per year pre-pandemic, a person making $15 an hour, or $30,000 annually, would lose about $600 a year without a pay increase—not a trivial amount for someone living paycheck to paycheck.

But 2 percent inflation growth is no longer our reality. Prices are now up 6.8 percent since last year, which is the sharpest increase in 39 years. If a $15-per-hour worker didn't receive a pay raise over this last year, his real earnings could fall by as much as $2,040.

Some workers did see a bump in their paychecks, albeit not enough to offset inflation. After accounting for increases in nominal earnings, the Bureau of Labor Statistics has estimated that, on average, workers experienced a 1.9 percent pay cut over the last year due to inflation. This means a $15-per-hour worker likely saw $570 disappear from his wallet.

Averages can often be misleading, though. Gas prices have climbed by 58.1 percent over the last year, and low-income Americans tend to spend more of their average dollar on gas. Indeed, a Federal Reserve Bank of New York study found that poor and rural households are particularly hard-hit when gasoline prices skyrocket, and this was a main contributor to "inflation inequality."

Finally, we should acknowledge another factor that masks the typical impact of inflation on wages: the unique labor shortage experienced in the last year, which was partially caused by lingering unemployment benefits and has led to higher-than-usual increases in pay for many workers. Without it, low-income workers would be significantly worse off due to climbing inflation.

Notably, some inflation is not always concerning—especially if it's steady, or temporary, or accompanied by simultaneously raising wages. But today, we can still say with confidence that low-income workers are in for a rough adjustment.

In contrast, most research shows that immigration has a small effect on wages in the short run, whether it's a positive or negative effect.

To put this into perspective, the highest-end negative estimate (and one frequently cited by opponents of immigration) finds that the relative wages of U.S.-born workers fall by almost 4 percent when immigration increases the number of workers within the same skill group by 10 percent. However, even this high-end estimate is often misinterpreted and miscited because it measures the relative impact and not the absolute impact on wages. In other words, it measures the effect of immigration on the wages of one skill group relative to another, and not how immigration impacts the total amount of money someone actually makes.

Over the past decade, immigration has increased the number of workers with only a high school diploma by 0.14 percent per year on average. Even if we put aside the problems of using the high-end estimate, this would result in U.S.-born workers with the same education experiencing a fall in income of about 0.06 percent annually. For our $15-per-hour worker, this amounts to a yearly pay cut of only $18 due to low-skilled immigration. That's hardly a comparison to the real impact of inflation on the same worker.

It's not even clear that we need to be making the comparison. The United States has experienced a net outflow of immigrants without a high school diploma since 2010, meaning U.S.-born workers who dropped out of high school would actually be earning more using that same estimate. Immigration patterns have shifted in the last few decades, with more high-skilled immigrants moving in. The research consensus is that high-skilled immigration improves the wages and employment prospects of all Americans, with long-term increases in innovative activity and economic growth.

The bottom line is that immigration fears seem to be overblown when we ground them in real numbers, while high inflation can harm many low-income earners in the short term. Today, compared to immigration, Americans should be far more concerned about inflation eroding their earnings.