What is the relationship between immigration and the business cycle? Before answering that question, let’s look at some evidence from Statista:

[The chart shows apprehensions and expulsions, but the data is widely believed to be highly correlated with successful undocumented migration.]

There seems to be a modestly pro-cyclical pattern to the data on undocumented migration. Apprehensions rose throughout the 1990s, peaking in 2000. They declined during the subsequent recession, before rising again during the 2004-06 housing boom. There was a steep drop after the 2008 financial crisis, which led to years of high employment. Immigration rose during the boom of 2019 and then fell during the Covid recession of 2020. Immigration was especially high during the period around 2022 when there was a labor shortage and a sharp rise in wages for low-skilled workers.

So it seems like a pretty clear pattern; a booming economy draws in more immigrants. Economy —> immigration. Case closed?

Not quite. I suspect that the causation actually goes in both directions. Policy-driven changes in immigration may also play a role in determining the business cycle. In previous posts, I suggested that the 2006 crackdown on illegal migration may have contributed to the subsequent housing slump. (To be clear, tight money was the main cause of the 2008-09 recession.)It seems plausible that policy changes also impacted the rate of immigration during the Trump and Biden administrations. A tweet by Catherine Rampell provides some more fine-grained data:

Rampell links to another tweet that suggests the recent drop in undocumented immigration is due to policy changes in the US and Mexico:

Because of retiring boomers and a drop in the birth rate, I expected the number of prime age workers to level off during the 2020s. That obviously did not happen. There’s increasing agreement that the big surge in payroll employment over the past 3 plus years has been driven by immigration, much of it undocumented. (As an aside, many undocumented immigrants now claim asylum and can work during the multi-year period required to process their claims. Thus they are not necessarily working in the underground economy.)

If I am correct that immigration has helped to drive the recent boom in the economy, then the sharp drop in immigration over the past few months might presage a slowing in the economy. Is this why the financial markets seem increasingly worried about the risk of recession? I’m not sure, but it’s something to think about.

More By This Author:

Making Huawei Stronger
Should The Fed Placate The Markets?
Reasoning From An Interest Rate Change