Where Will the Workers Come From?

When Politics Collide with Economics

The US Census Bureau recently updated its population estimates to include the year 2024 (years end in July).  The data should serve as a cautionary tale for policymakers.

The good news for an economy that has been suffering from labor shortages is that population growth accelerated in the year ended July 2024.  The population grew by 3.3 million for the year, which translates to a growth rate of 0.98%.  As you can see from the chart below, that growth rate approximated the growth rates at the turn of the millennium before the rate gradually fell to a low of 0.16% in 2021 following COVID’s arrival.  The rebound in population growth should be considered a win following several years in which companies were not able to find enough workers to fill vacant jobs.

The not-so-encouraging news, for some anyway, is that for the fourth straight year the lion’s share of our population growth came from immigration.  That lopsided mix represents a stark contrast from the years prior to 2021 when “natural” growth accounted for most of the overall population growth.  (“Natural” growth simply means births minus deaths) In fact, of the total population increase of 8.5 million over the past four years, about 7.2 million, or 84%, was attributable to net immigration.  Natural growth added just 1.4 million, or 16% of the growth.

Why are these numbers important for policymakers?  Because we just went through a period of quite severe labor shortages in this country.  The ratio of job openings to those considered officially “unemployed” peaked out at about 2.0x in early- to mid-2022.  As you can see from the chart below, the labor shortage caused wage growth to spike to a peak of about 5.9% at around the same time.  The fear of a wage-price spiral, which refers to a situation whereby strong wage gains lead to more widespread inflationary pressures, caused the Fed to begin an aggressive series of interest rate hikes that took the Fed Funds rate from near zero to a high of 5.25%-5.50% by mid-2023.

A cursory analysis of this data leads me to think that the new presidential administration’s economic policies are somewhat incoherent.  President Trump wants more companies, both domestic and foreign, to produce goods and services within the US so that US workers will have more job opportunities.  It seems he is willing to use both carrots (tax breaks) and sticks (tariffs) to achieve that objective.  At the same time, though, the new administration seems intent on dramatically reducing net immigration, to include the deportation of millions of undocumented folks already living and working in the US.  My question is, how does President Trump expect the companies that do decide to move production to the US to find enough workers?  And if they are unable to find enough workers, will the threat of a wage/price spiral return and force the Fed to reverse course and start hiking rates again to reduce the inflation threat?

The market exuberance over more “pro-growth” economic policies continues.  At the same time, the Fed has been trying to rein in growth so as to bring inflation down to its target of 2%.  Recent data points suggest their job may be far from over.  Too much of a good thing can be bad, and we’re hoping the new administration doesn’t figure that out the hard way.