Immigration Curbs May Be Wrong Way to Boost Weak U.S. Wage Gains

  • Employers cite labor shortages yet stay reluctant to lift pay
  • Trump’s aim to curb foreigners seen as no help to growth

HSBC's Bloom Sees No Pick-Up in Wages in U.S.

It’s high time American workers saw bigger paychecks. But President Donald Trump’s plan to do that by limiting immigration may not be the right tool for the goal.

Average hourly earnings rose 2.5 percent in July from a year earlier for a fourth straight month, matching the rate of the past two years, according to Labor Department data issued Friday. While hiring continued at a solid pace and the unemployment rate matched a 16-year low, growth in worker pay has stalled at levels below recent expansions that typically produced gains of 3 percent or faster, even as companies frequently cite labor shortages.

Enter Trump, who this week endorsed a proposal to restrict legal immigration and give priority to those with higher skills, arguing that in the process, wages would rise across the board. While attracting the world’s best and brightest may be a worthy goal, many economists doubt that shrinking the pool of foreign workers will make employers boost compensation, or help the economy, attributing the weak pay gains to other factors.

“Weak wage growth has to do with the real change we’re seeing in corporate behavior and longer-term trends” such as automation and the rise of mega-firms that have more leeway to limit labor costs, said Scott Brown, chief economist at Raymond James Financial in St. Petersburg, Florida. “Companies are not going to boost your salary until you have one foot out the door. That’s the way Corporate America works these days.”

Besides, “I don’t think immigration has that big of an impact on wages,” so the new plan to restrict it “doesn’t make much sense at all,” Brown said.

Green Cards

Republican Senators Tom Cotton of Arkansas and David Perdue of Georgia have proposed legislation to evaluate visa applications based on merit, with a preference for people with higher education or job skills. The bill, seeking to dramatically overhaul the current system, would significantly slash the number of green cards issued, and eliminate some benefits for prospective immigrants with family members already in the U.S. It would also cap annual refugee admissions, and end a visa lottery meant to diversify the immigrant population.

The plan “will reduce poverty, increase wages and save taxpayers billions and billions of dollars,” Trump said at the White House on Wednesday. The U.S. should “favor applicants who can speak English, demonstrate they can financially support themselves and their families, and demonstrate skills.”

While the bill is unlikely to pass the Senate, Trump’s support reflects pledges he made on the campaign trail to limit immigration and help working Americans.

Meanwhile, the solid run of hiring, business and consumer surveys -- as well as company comments -- indicate workers at all levels of the skills ladder are in demand. Job openings remain elevated and the Federal Reserve’s regional surveys mention worker shortages. The National Federation of Independent Business reported that in July the share of small firms having trouble filling positions was the highest since 2000.

While supporters of the proposed immigration restrictions say they would help low-income and minority Americans gain employment, the July data showed Americans on the sidelines and those who are less qualified are also getting absorbed. This is happening even as current levels of immigration remain intact, indicating there’s work for those who want it.

Local Demand

Still, few employers are willing to pay more, and the industries and regions seeing a pickup are driven by localized supply and demand, said Brown, who’s noticing this in his area in Florida.

Fed economists, as well as Chair Janet Yellen, have made the case that immigrant workers would expand the labor force and cushion the slide in the participation rate under way due to an aging population. By spurring innovation, foreigners have also helped boost U.S. productivity and create new businesses.

Even with changes in immigration, “in the long run, it shouldn’t affect aggregate wage growth,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. At the same time, it could potentially affect how wages of skilled workers perform relative to their less-skilled counterparts, he said.

The persistent weakness in worker pay is entrenched in other longer-term trends. Among those: robots or technological change, low productivity, and more consolidation that has created bigger firms with greater power to set wages. 

Outsourcing to low-cost overseas locations and the decline in union membership in recent decades also has hurt workers’ bargaining power.

“I don’t think immigration policy can be finely tuned to address cyclical economic issues” such as wage growth, said Feroli, who previously worked at the Fed. Achieving an acceleration in earnings in the shorter term is “probably better addressed by things like monetary policy than immigration policy.”

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