Fewer Immigrants Would Hurt Some Industries More than Others
U.S. nonfarm payrolls added roughly 5 million net jobs over the last two years. Increasingly, firms have been finding it difficult to fill open positions as the US unemployment rolls continue to fall while labor force participation rates barely budge. Since the beginning of 2015, job openings have exceeded hires as firms search for employees with the needed skills. Yet in this environment, the current administration has begun to implement restrictions on immigration. There is no question that US GDP growth has been slowed by the aging of the US population, lower fertility rates, and structural decline in labor force participation, since all of these are slowing growth of the US workforce. Immigration has been providing a much-needed pressure release valve, but that may now been shutting down – at least temporarily. The question for investment strategy requires sorting through the potential disruptions of even temporary restrictions on immigration, since these can have long lasting implications for future growth, profits, and valuations.
The Trump administration has thus far moved only to halt immigration from seven majority Muslim countries for the next 120 days, but drafts of other executive orders suggest that the restrictions could be more far reaching. We may see a reversal of President Obama’s “Dreamers” program which would have allowed scores of young adults and children who arrived here illegally before the age of 16 to remain in the US. There is already talk of restructuring the H-1B visa program, which allows firms to bring in highly skilled foreign workers. And, of course, a significant portion of the current stock of illegal immigrants (over 11 million of them) may be shown the exits. All of these policies would have the effect of reducing labor to firms in the US.
The US Census Bureau’s tracking of foreign born workers shows that immigrants currently account for roughly 17% of the US workforce, and that figure has climbed from just over 15% at the beginning of the recovery. Firms in the US have come to rely on immigrant labor, both legal and illegal, though recent political debate questions the benefit of such labor for the US economy and for the wages of the working class. Yet research shows that immigrants have had a only small negative impact on the wages of American workers with less than a high school degree, but have had a positive impact on wages of those in the rest of the population. The latter effect is driven by the positive contribution immigrant labor has made to overall economic activity. Efforts that curtail immigration are likely to hinder growth and income rather than boost it. Immigrant workers are found in higher proportions than US citizens in construction, leisure services, manufacturing, information, and agriculture. This distribution comes as no surprise and points to areas of the economy likely to come under increasing pressure should immigration be curtailed for any length of time. The first impact will likely be on wages in those sectors – exacerbating current worker shortages will force firms to raise wages to attract replacements from the dwindling population of the US workforce given unemployment now sits at 4.8%.
At the other end of the spectrum is the threat of constraints on the inflow of high tech foreign labor. Highly skilled labor is already in short supply in the US even though the number of students pursuing STEM majors (science, technology, engineering, and math) majors has been rising for the last decade. Restrictions on student visas and on the H-1B visa program would only worsen labor shortages at the high end of the skills spectrum (where unemployment is down to 2.5%), at least temporarily. Currently, H-1B visas are allocated through a lottery and most of those in recent years have been awarded to Indian information systems companies located in the US (TCI, Infosys, Wipro). As originally conceived, the H-1B visa program was meant to help US companies find additional highly skilled labor since those firms were facing shortages, particularly of engineers and scientists, among the American work force. But with a lottery, the companies which submit the most applications end up with the most visas, and it appears the these Indian companies have been dominating the application process, much to the consternation of US tech firms and politicians. A change in the system may ultimately prove beneficial to the US tech industry, but the short term disruption, should the visa program be suspended while it is restructured, could have long-lasting implications. Already, firms such as Microsoft have expanded operations in Vancouver, Canada because it cannot bring enough workers from abroad into the US. Once such operations are established, they often prove costly to reverse. Any short term disruption to visa programs could accelerate the move to Canada by the US tech industry, and that ultimately would constrain already weak US growth.
Yet firms will not stand idly by while these changes take place. Initially, they will fight through political and legal channels. But if policy changes stick and new restrictions appear likely to materialize, we should expect firms to find longer term solutions. Merely an increase in uncertainty around access to foreign sources of labor could be enough to prompt a reorganization of activity – whether that be the location of some R&D staff, the location of staff who provide services to international clients, or through the technology used in manufacturing. Immigration restrictions, regardless of the response of firms, will raise wages, more in some sectors than others, and this only adds to already building inflationary pressures. The traditional response to rising wages has been and will continue to be automation, and those companies with the ability to respond most effectively will be the ones to thrive under the new immigration rules. Investing in an environment of disruptive policy changes such as this must not only be sensitive to the macro implications, but must also identify company-specific attributes which could favor success.
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