How Labor Shortages Drive Inflation and How Immigration Can Help

by Cecilia Esterline

This piece is part of a larger series on how immigration can help relieve U.S. labor shortages. You can explore the full series here.

The first piece in our labor shortages series demonstrated how labor shortages negatively impact Americans’ quality of life. The staggering inflation rates were an added blow over the last year, and these two phenomena are connected as labor shortages contribute to the inflation rate’s unsustainable growth. Supplementing our labor force by recovering pandemic-era immigrant worker losses can help reduce inflation in the U.S.

With a national total of over 10 million vacant jobs and an unemployed population of less than 6 million, businesses are forced to compete over a limited pool of qualified and willing workers. While market competition is good, if a business can’t quickly fill vacant positions, it may need to pay its staff overtime to maintain prior productivity or lower its productivity to account for unfilled positions. Both of these options will likely reduce profit levels, and these losses are often passed on to consumers through higher prices.

The competitive recruitment process–which hit an all-time high in the past year– can also drive up employer costs in several ways. For example, employers might raise wages or offer additional benefits to attract potential workers or retain current staff. It has also become more common to spend more on the recruitment process itself. Advertising vacancies, interviewing candidates, and conducting background checks are all cost-intensive practices that require investment of both time and money. Even after a hire is made, onboarding requirements may lower the productivity of established employees who must now dedicate time to supervising and training new hires. What’s more, new employees may not be able to contribute fully until they are well-versed in company practices.

These circumstances place significant financial strain on businesses–particularly small businesses who typically operate with lower profit margins. This leads business owners to increase prices, which in turn creates a snowball effect. For example, a farmer may have been forced to charge more for his crop due to increased labor costs, so the restaurant that buys his vegetables now has to charge more for its meals as a result of both increased labor and input costs.

Immigration plays a critical role in these labor shortages and thus can help reduce inflation as well. As described in our previous installments, the U.S. economy is likely missing nearly 700,000 permanent immigrantsin addition to many temporary immigrants who also supplement our domestic workforce.

Without these immigrant workers, U.S. inflation rates and the labor market itself has spiraled, and the impacts of the resulting shortages are felt by American consumers every day. If the U.S. efficiently attracts foreign talent and promptly compensates for the missing immigrant workers, the newcomers can help ease labor market tightness, drive down inflation, and improve the quality of life for all Americans.

This post originally appeared on Niskanen Center Reprinted with permission.

About The Author

Cecilia Esterline is the Immigration Research Analyst at the Niskanen Center, where she focuses on employment-based visa policy, international student retention, and economic research. Prior to joining the Niskanen Center, Cecilia worked at the Migration Policy Institute and the Bipartisan Policy Center on similar research portfolios. She also worked in immigration legal services with Fragomen, Del Rey, Bernsen & Loewy and the D.C. Bar Pro Bono Center. Cecilia holds a Master of Science in International Migration and Public Policy from the London School of Economics and Political Science and a Bachelor of Arts in International Studies: World Politics & Diplomacy and Latin American, Latino, and Iberian Studies from the University of Richmond.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.