Introduction: Two key macro-economic signals I have always asked my students to watch were:
- ten-year treasury bond rates and
- monthly net employment statistics
The logic for watching employment numbers is fairly easy. More employed adults result in more economic output and more demand for all sorts of real estate. In the US, historically, we have added about two million new people per year based on births minus deaths with much of that increase based on longer lives. We also have been adding about one million in net legal immigrants per year. The illegal immigration rate has varied over time and is always more difficult to estimate. Using the legal figures and the net population growth, factoring in the labor participation rate and proportion reaching 18 years of age, we end up needing about 1.5 million net new jobs per year in order to maintain full employment of the available working age population. This works out to about 125,000 net new jobs per month as our target. Whenever we hear of job reports above 125,000 that has been a net positive for the economy in terms of full employment, and when the figures were below 125,000 then economic growth was inadequate.
Net Population Growth Slowing: While the above math worked well enough for the US as a whole, there are regions where the net population is not growing, thus without immigrants into areas like the New England states, there would be less economic growth or none. Now we are approaching an era where the US net domestic population growth rate is slowing and we are deporting immigrants, mostly illegals, restricting the entrance of new immigrants and deterring many international students via less research funding and more restrictive admission policies. What will happen if we take the historical net immigration flow of about one million new residents, deport others, and bring that net to zero or less?
New Math on Minimum Job Creation: Instead of needing 125,000 net new jobs per month, we would need only 82,500 and if the population growth rate continues to slow, we can reduce that figure further. If we deport one million immigrants and restrict in migration, certain industries will be more impacted than others. We should keep in mind that immigrants earn about 70% of what US Citizens earn for similar work, and many analysts will argue that there are some jobs for which all US citizens find unpleasant and for the most part avoid. These are especially concentrated in agriculture, construction (especially roofing), leisure and hospitality work, large city taxi driving and some restaurant jobs. Many of these industries use unauthorized labor and have done so for decades. Crop pickers are 43% immigrants and that figure would be higher were it not for automated equipment that replaces some human labor for crops like corn. For some crops like strawberries and artichokes the figure is near 100% immigrant picked. Nearly 60% of all US taxi drivers are immigrants. In the US nearly 20% of our labor force are immigrant non-citizens.
The US is not unique: Other countries also use immigrant labor, much of it unauthorized. The UK also utilizes about 20% immigrants in its workforce. In Luxembourg the figure is 60%, in Switzerland 35%, in Canada 30%, and in Germany 21%. Aside from Japan now rethinking its labor policies, the US is clearly leading the way in this new citizen-centric labor policy.
What will the constrained labor force do to the economy? Economic growth can still occur with less labor, and the implementation of AI is certainly enhancing economic growth in nearly all sectors of the economy. But there will be labor shortages and where there are shortages in agriculture, construction and lower-paid services, we will see wages go up by 20% or so within a few years. Overall, the impact will be more modest, since these affected industries represent slightly less than half of all industries. Still, there will be a modest labor driven impact on inflation, and/or a slowdown in economic productivity for those sectors and parts of the country that find themselves with labor shortages.
Inflation rates and rents: Inflation rates and longer-term nominal interest rates will be modestly affected by the increase in labor costs. At the same time, food costs will be much higher and so what is a modest overall increase in the CPI will feel like a 10% plus hike to those whose incomes are modest. New home buyers will also see prices rise driven by construction labor cost increases. Hotel rates will need to rise affecting the business travel sector and convention tourism industry. Investments in AI will not replace the hotel house cleaner or crop picker, or roof contractor, at least not for a while.
Somewhat like higher interest rates slowing construction down as projects fail to achieve feasibility until rents rise, higher labor costs will similarly affect construction rates and so multifamily rents will continue to outpace inflation.
Longer term economic growth: In the US, the brain drain that once benefited the US when competing with Europe and Asia will reverse. Over 70% of all US based newly minted PhD have stayed in the US in the past several years, but with research funding down and a much more restrictive immigration policy, many of these students are looking outside the US. Meanwhile, US universities often dominated the salary competitions with Europe and Asia for Professorial talent, but now many of those Professors are considering European or Asian schools. Cambridge, for example, has said thank you to the US for steering good students and good Professors in their direction. This will affect the longer-term economic growth of the US as it is difficult to switch the momentum of such a tsunami of rechanneled demand for higher education and research facilities.
Conclusions: Politically driven policies on immigration have short term, intermediate and longer-term consequences. In general, these policies will slow down US economic growth, force wages to grow at an accelerated pace, and decrease economic prosperity in the long run. Developers will suffer but existing real estate portfolios will benefit from the lower supply output at higher costs which will in turn keep rents higher than otherwise. Tax law changes in the US will also help to positively offset the negative value impacts from long term interest rates, that will remain higher as a result of higher inflation from both tariffs and labor cost increases. In three years, some new resident in the White House may attempt to reverse these immigration policies, but the damage will linger for many years.
