Immigration and unemployment

0:06Pushkin. Last week at his big press conference, Jay Powell, chair of the Federal Reserve 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. He said this, It depends on the inflows. If you're having millions of people come into the labor force and you're creating 100 ,000 jobs, you're going to see unemployment go up. Today on the show, immigration, the labor market, the Fed, and the economy. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

0:55I am Rob Armstrong. I'm coming to you from Unhedged World Headquarters in beautiful New York City, where I'm joined by Aidan Reiter. Good morning. My colleague on writing the Unhedged newsletter. Aidan, 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? So he's directionally right. But it might be a bit of an overstatement. Yes. That on Wall Street directionally right is how we say wrong, I think. So you agree basically? Basically, yes. Okay. But we talked to some really smart people.

1:36Okay, but it seems like, wait, 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. Yeah. 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 because 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? divided by the entire working age population, which is around 170 million.

2:12Powell's point seems quite straightforward. People come in the country, workforce gets bigger, denominator gets larger, unemployment rate goes up. What's so hard? 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. Okay. 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 - They're coming in, they're buying food, they're going to the grocery store, they're going to restaurants.

2:51Those people need to be served. Exactly. So yes, they also increase aggregate demand and aggregate goods in the economy. I think this is why in general, economists tend to be positive on immigration, at least in the case, the United States. Cheap labor in a tightish labor market is a good thing. And more demand is a good thing. And so it's kind of positive. But I want to 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.

3:30And then we need to measure everybody else so that we know what the context is. Can we measure these things very accurately? Well, it's a pretty tough task. Undocumented immigrants are undocumented by their very nature. Yes. 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. Yes. But we have some pretty good estimates that we can use for some of those questions you asked. Okay. Give me one of them. You know, again, this is backwards looking data, But the Congressional Budget Office had projected there to be 1 million new migrants in 2023, back when they did their demographic outlook in 2019.

4:10They upgraded that number to 3.3 million last year. Yeah. They said we got an extra 2.3 million people than we otherwise would have in 2023. That's a huge surge. Yeah. And how big is the workforce? Remind me, just so we can - It's just under 170 million. Right. And we should note that's not everybody who's of working age. That's people who are working age and want to work. Work. So you have an addition of three over 170. So that's increasing the potential, potentially increasing the labor force by a couple of percent. I mean, it's non-trivial. It's absolutely part of the picture. Yeah, yeah. But keep in mind that those people are also working.

4:48So they get put into the numerator. Some of them. Yeah, yeah. 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. 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.

5:22We 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? Are you employing? 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 print? Do your workers have work permits? So it's like, there's not a primary source of information within the data the Fed is looking at to answer this question. Yeah. There are other surveys like census surveys that capture that, but again, And it's not direct.

5:53And 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, right? 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 penalize employers through those surveys. People will still not accurately report. 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?

6:22You know, it's an issue. for employers. 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. Yeah. 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. I want to stop on that point for one second.

6:51One 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 of those economists have mentioned to us that they think part of the reason for this happy outcome is that the labor market cooled because there's more workers because people are streaming across the border. Yeah, absolutely. So say you have a hot economy like the US has been. Aggreg demand is high after a couple of years of people sitting on those savings. Yes. They've demanded a lot of goods and services. You need people to do that.

7:28Yeah. 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 and up again. Everybody demands, it's the classic wage price spiral. Yep. There's 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. Yes. That didn't happen. 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, they said, hey, we're going to help power this economy, essentially.

7:58Now, I want to mention now, but I don't necessarily want to 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 want to characterize the fact that the labor market cooled in part because immigrants came in. Do you want to say somebody's stealing somebody else's job? Do you want to say, do you know what I mean? Don't we want higher wages for workers? Does immigration mean that's not happening? 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. Yeah.

8:32And it's complicated, right? I completely understand people who say, if you have a workforce that doesn't have great negotiating rights, because they're undocumented. They can be 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. 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.

9:03And then more people get fired. we're not shooting at a stationary target here. We're like in disequilibrium and we're kind of stumbling our way to some kind of new labor market equilibrium. Yeah. And on the labor market equilibrium, one of the interesting things that came out in our conversations is that 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 can't turn to the workforce at a natural pace in order to keep unemployment rate steady. They had bought between 120 ,000 to 150 ,000 jobs a month.

9:37It'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 new jobs a month. This is such a hot economy. Not really. 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, more workers in it. Yeah. And it makes the most recent reading, 89 ,000, look that much weaker. 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, not shrinking.

10:21If that's over 200 ,000 and the last monthly reading is 89 ,000 jobs added, this is a pretty cold job market now. Yeah. One month is just one month, as we love to say at Unhedged. We might be surprised by a high number. The number is volatile, et cetera, et cetera. 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. It seems the Fed got hip to this. Yeah. They are looking at these job additions and saying, you know, we have 3 million more workers in this country. This is something we have to worry about. Yeah. You know, what's hard about this whole thing is that it's hard to measure immigration.

10:59It'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. It's very interesting to speculate about this. And I want to emphasize 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.

11:40Powell did mention it in one sentence in his press conference. In a question answer, not even in his speech. 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 going to get drawn into a political fight where we really don't belong. 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?

12:10So we've said, oh, there's this huge surge in undocumented migrants coming over the border. Yes. 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 refugee status, et cetera, you actually are legally permitted to work. You just have a short term work visa while you await for a court date. Yes. So he doesn't want to 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.

12:42Yes. I want to 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. Yeah. 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? It's a good question.

13:28I'm 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 working age population. So the workforce is always growing. That's just the nature of being this economy. Or you better hope it is, or else you're Japan and you've got a whole different set of problems. Precisely. So it's a good problem to have, especially in the past when we've had labor shortages. In terms of inflation, it's really, really hard to say.

13:57If the economy were to stay hot and you don't have enough labor coming in, then yes, you could have an inflationary spiral. But our economy is cooling off to some degree. We're in this soft landing stage. So if anything, we've actually set the ground to have more population in the future, right? If you have a migrant population here that 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.

14:27It just depends on which direction the economy goes in the couple months. If it wasn't for the short term, everything would be so easy. We'll be right back with Long and Short.

14:50listeners 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 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. Yeah, long moribund hardly even covers it. Yeah. And that stock market has been a disaster. It's been bad. For a couple of years. They made a pool of about 800 billion rent mid-b, that's about 100 billion US dollars to give to asset managers, and then also to give to companies to do stock buybacks, to try to revive equities.

15:35So they're like, here's money, buy stocks. Yeah. And then on top of that, they did a couple other monetary stimulus moves that would theoretically support more Chinese investors, retailers, or other people putting their money in the stock market. I don't think it's going to work. Okay. 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. So while this might give a little bump to market, it's not going to help the economy for a couple of reasons. A, the economy is still not doing great. The housing market is terrible, and that's where most Chinese households put their assets.

16:11If that's still terrible, they're not going to fix it. They're not going to put their money into the equity market. Yeah. They're not confident. Yeah. There's been some in this bond buying surge where people have piled into bonds. They lowered rates the other day, that theoretically helps more people buy bonds. Yes. Especially if you're trying to make more liquidity. If there's nobody borrowing because the economy is not great, they're not going to go put that money in the market if they don't want to borrow. Yes. So the banks, you're saying, will buy bonds because what else are they going to do?

16:41What else are they going to do? Even though the Chinese government is very clear, they don't want people to buy bonds. Yes. Same with households and same with 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. All right, I'll take the other side and I will go long. Chinese fiscal stimulus. I agree with you 100%, 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.

17:30And 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. And, you know, theoretically, the momentum of the stock market stimulus will ride off that. Yes. But we still have a lot to see. Yeah. Including they haven't put numbers to that fiscal stimulus. I know. We've just got words, no numbers yet. 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.

18:17Usually ears, right?

18:22Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta 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 slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

19:03We'll be right back.