Explaining the Latest Jump in the U.S. Labor Force
Former JPMorgan Chase Global Chief Economist, (Ph.D in Economics) & Current BrightQuery Chief Economist
Many market observers were surprised by the +747k jump in employment as tallied by the U.S. Household Employment Survey. The U.S. fertility rate is hovering at 1.78% in 2023, well below the 2.1% replacement level required to maintain the existing labor force as people retire or die. This puzzle can only be explained by the surge in immigration. Leaving judgments about immigration to our readers, the Household Employment Survey revealed that the share of foreign-born individuals as a share of the U.S. labor civilian labor force rose to a record high in October 2023 and helped explain why the U.S. labor force expanded by +532k, while employment rose by +747k!
Labor Force Participation Rate
The U.S. labor force participation rate increased to 62.8 in October 2023 from 62.7% in the prior month, suggesting that more individuals entered the U.S. labor force. This is exciting news for those worried that U.S. workers would remain on the sidelines waiting for higher wages!
Interestingly, the foreign-born U.S. labor force participation rate stood above the levels for the entire U.S. labor force with a reading of 66.5% in October 2023, albeit down slightly from the prior month’s reading of 66.6%. Such evidence suggests that after immigrants receive their work authorization (i.e., via temporary work visas or Green cards), their propensity to work is higher than that of the general labor force.
Other Reasons Why Immigration Boosts the Labor Force
It is no secret that immigrants coming into the U.S. tend to be younger than the 38.8 median age of the general population. Within the most important segment of the workforce, those between the ages of 25 and 54, the labor force participation rate stood at 83.3% in October 2023 versus a reading of 38.8% for individuals 55 or older. So, as the U.S. population ages, not only will the U.S. come up short in replacing its labor force, but the aging demographics will also put downward pressure on the labor force participation rate.
The Unemployment Rate Surprise
Despite market expectations that the U.S. unemployment rate would rise this month, it dropped to 3.7% (October 2023) from 3.9% the prior month due to a 747k gain in employment. Fortunately, the surge in the U.S. labor force offset market concerns arising from the drop in the unemployment rate. Lower unemployment rates raise fears of an overheated labor market capable of pushing wages higher and boosting overall inflation.
However, against this backdrop, the University of Michigan Sentiment Survey 12-month ahead inflation expectations yearly growth dropped sharply to +3.1% (November 2023) from a growth pace of +4.5% (October 2023)!
Source: University of Michigan Sentiment Survey
Wages
Not surprisingly, these diminished inflationary expectations permitted financial markets to look through the slight disappointment in average hourly earnings for all employees, which rose by +0.4% (about +0.1% hotter than expected) on a MOM%. The yearly growth pace remained unchanged at +4.0% (October 2023) on a YOY% and stood well below its recent +5.9% peak (March 2022).
Job Switchers versus Job Stayers
Another impressive development was seen in the Federal Reserve of Atlanta survey. The spread between workers switching jobs (+5.6% YOY%) and those staying at their current jobs (+4.8% YOY%) narrowed sharply in the latest month! Such evidence further supports the view that suggests that the massive surge in immigration may have moderated labor cost pressures and lowered inflation expectations.
Source: Federal Reserve Bank of Atlanta
Summary and Concluding Thoughts
Without taking a position on immigration, which we leave to the reader to decide for themselves, we find that immigration has boosted the size of the U.S. labor force and the labor force participation rate. The obvious implication of this development has been to put downward pressure on wage growth, a goal that the Fed has sought to achieve since it began raising interest rates in March 2022.
Some may view this as a good sign that the strong growth in immigration will permit the Fed to raise rates by a lesser amount since this will put downward pressure on wage growth and inflation expectations. Others might be disappointed that this development might dampen wage growth, which some believe may hurt existing workers.
Still, the fact remains that Fed Chair Powell has stated on several occasions that the Fed hopes to bring wage growth to about 4.0%. The Fed derives that figure by adding its 2.0% targeted inflation rate plus 2.0% for productivity growth. Ironically, U.S. productivity grew at a +2.0% yearly growth pace in Q3 2023. Unfortunately, this jump mainly reflected an unwinding of negative growth rates observed in prior calendar quarters.
Without taking a position on immigration, it appears that the Fed could achieve its inflation goal by raising interest rates to levels that will accomplish its task or increase them less if the economy was able to slow wage growth by reducing labor demand (e.g., by relying on Artificial Intelligence) or by boosting its labor supply via immigration.
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