What is the relationship between immigration and the business cycle? Before we answer that question, let’s look at some evidence from them Statistics:
[The chart shows apprehensions and expulsions, but the data is widely believed to be highly correlated with successful undocumented migration.]There appears to be a modest pro-cyclical pattern in the undocumented migration data. Fears increased in the mid-1990s, peaking in the 2000s. It declined during the subsequent recession, before rising again during the housing boom of 2004-06. There was a sharp decline after the 2008 financial crisis, which led to many years of unemployment. Immigration increased during the 2019 boom, then decreased during the 2020 Covid recession. Immigration was highest in the period around 2022, when there was a labor shortage and a sharp rise in wages for low-skilled workers.
So it seems like a clear pattern; a booming economy attracts more immigrants. Economy —> immigration. Case closed?
Not really. I suspect the cause goes both ways. Policy-driven changes in immigration can play a role in determining the business cycle. In previous posts, I have suggested that the 2006 crackdown on illegal immigration may have contributed to the subsequent housing slump. (To be clear, hard money was a major cause of the 2008-09 recession.) It seems reasonable that policy changes also affected immigration rates during the Trump and Biden administrations. A tweet by Catherine Rampell provides some excellent information:
Rampell links to another tweet which suggests that the recent decline in undocumented immigrants is due to policy changes in the US and Mexico:
Due to the retirement of workers and declining birth rates, I expected the number of high-skilled workers to decline in the 2020s. That obviously didn’t happen. There is growing agreement that much of the increase in wage employment over the last 3-plus years has been driven by immigrants, many of whom are undocumented. (Besides, many undocumented immigrants now seek asylum, and can work during the many years it takes to process their applications. They are therefore workers in the underground economy.)
If I’m right that immigration has helped drive the recent economic growth, then the sharp decline in immigration over the past few months may indicate a recession. Is this why financial markets seem so concerned about the risk of recession? I’m not sure, but it’s something to think about.