Labor Shortages and Declining Work Ethic: Why the U.S. Needs More Immigrants

They took our jobs.

This line from the comedy South Park is symbolic of the anti-immigration side for a number of years now. What this side has argued is known as displacement theory. The theory hypothesizes that the inflow of cheaper immigrant labor pushes low-skilled, native-born workers out of the labor market. If that supply were cut off or severely limited, this would raise wages to give low-skilled, native-born workers a chance. The pandemic created a number of peculiar, atypical economic conditions. One of those anomalies was the de facto border closure in 2020-21 that was triggered by the pandemic. As University of California-Davis economics professor Giovani Peri shows, the United States has taken in 1.7 million fewer immigrants than would have come at the pre-2020 trend.     

In 2020, I showed how the displacement theory did not play out in reality. In case that were not sufficient, the pandemic provided us with a natural experiment to further disprove the notion. There were fewer immigrants entering the United States during the pandemic than beforehand. Yet the United States has an official unemployment rate of 3.5 percent and yet there are 10 million unfilled positions. As this piece from the Nisaknen Center illustrates, this labor shortage is affecting multiple industries.  

The labor shortage is certainly a perplexing one. About a year ago, I was trying to wrap my head around why there was a labor shortage. My responses ranged from unemployment benefits and the pandemic to lack of childcare and "The Great Resignation." There are multiple facets that have changed, whether that is schools reopening, higher vaccination rates, more people getting reacclimatized to a pre-pandemic normal, or the expiration of the additional unemployment benefits that were allocated. 

Wages have been rising, but workers are not getting back to work. The labor force participation rate is at 62.3 percent, which is an entire percentage point lower than it was before the pandemic (Federal Reserve).

Why are workers not getting back to work? There has been much ink spilled on why the labor force participation rate has been on the decline. The Census Bureau pins it on retiring Boomers. Some economists think it is due to shifting marriage patterns (e.g., Binder and Bound, 2019). The Richmond Federal Bank adds a decline in male educational attainment, increased substance abuse, and video games to the list. The libertarian Reason Magazine provides an interesting theory: Americans are losing their work ethic. This is in part illustrated by the fact that the U.S. labor force participation rate is bad enough where OECD data show that is has fallen below OECD average (see below). 

If declining work ethic is indeed at play, there is not a quick fix to regain a prioritization of people working hard. Nevertheless, the U.S. government can do something to do it. It can let up on the pandemic-era immigration restrictions and let more immigrants in. As the Kansas City Federal Bank shows in its May 2022 report on the topic, reduced immigration has exacerbated labor shortages. The subsequent wage pressure to attract workers unsurprisingly increases inflation. This report posits that immigration could help increase labor force participation. Given the positive effects that immigration has historically had on labor markets, that would not surprise me. Bureau of Labor Statistics data show that foreign-born Americans have a higher labor force participation (also see below). By removing visa caps, allowing for more immigrants into this country, and address the immigrant backlog, we can help make a significant dent in the labor shortage and get our economy back on track.