Minneapolis Fed President: let immigration meet labor demand to boost economy

A steady stream of immigrants will be important to the funding future of entitlement programs in the U.S. and for the health of the economy as a whole, the president of the Federal Reserve in Minneapolis told an audience in Brookings this week.

President Neel Kashkari shared those insights at South Dakota State University on Wednesday evening during a conversation about inflation, the labor market, and the economy.

Demographic trends point to challenges

The U.S. faces major economic hurdles, Kashkari told the crowd, particularly as people have fewer children.

“We’ve been able to supplement our growth with immigration throughout our history,” Kashkari said. “And the question is whether we are willing to embrace that going forward. For one, I hope we are, because it’s a very powerful way to continue driving our economy.”

More workers would help uphold some major entitlement programs, such as Social Security and Medicaid, Kashkari said. Current workers are paying for retiree benefits, rather than banking funds for their own retirement.

“As our society is aging, that ratio is getting imbalanced and these programs run into a challenge,” he said.

Resolving that labor force issue is what Kashkari considers the number one way to boost the U.S. economy. In light of lower birth rates, the clearest path to a wider labor force “is fixing our immigration system so that we have an immigration system that meets the needs of our economy,” Kashkari said.

Kashkari said the pandemic pushed more people to retire early, and to drop out of the workforce altogether. 

“Inflation comes from more demand for goods and services than there is the supply of goods and services,” Kashkari said. “Because we’re missing all these workers, our economy’s potential to supply goods and services is lower than it otherwise would have been.” 

S.D. faring better than U.S. in population

The workforce picture isn’t quite as dire in South Dakota as it may be in other states, although its population growth looks different from zip code to zip code.

South Dakota’s total population is up by 8.9% from 2010, according to 2020 Census numbers. The state has the nation’s second-fastest-growing Hispanic population. The Hispanic population increased from 2.7% in 2010 to 4.4% in 2020.

The population growth hasn’t come from maternity wards, however. The number of live births in the state was generally steady over the last decade, until 2016 where the state saw the number of births drop from 12,270 to 10,951 in 2020. 

Urban areas like Sioux Falls continue to add children to their school systems, even as birth rates and class sizes continue to decline in much of the state. 

That reality for school districts in the Sioux Falls metro area isn’t tied to higher birth rates, however. The state’s largest city and the smaller towns that surround it saw their collective kindergarten class size hit a figure 28.9% higher than the graduating class from 2022. Most of that growth came through in-state movement from rural to urban areas and in-migration from other states.

But none of that means Sioux Falls is without reliance on international migration. Sanford, for example, is planning to hire 40 international nurses over the next year in Sioux Falls.

Fed role in inflation management

The Federal Reserve is the nation’s central bank, created by  Congress in 1913 to help manage the ups and downs of the U.S. economy. The government developed 12 regional banks – the Federal Reserve Bank of Minneapolis being the ninth.

The Fed has a dual mandate to maintain price stability and low unemployment. 

That job is really a balance, Kashkari said, because low unemployment leads to higher wages, which leads to higher prices, which can prompt the Fed to raise interest rates to cool the economy.

“That is how we typically think of it (the Federal Reserve) working,” Kashkari said. “That is not what has happened in the past couple of years.”

Unemployment is low in the U.S., but today’s inflation isn’t driven by high wages, Kashkari said. Global supply chain issues caused by the pandemic, an overstimulated economy and the Russian invasion of Ukraine are behind the inflation of 2022.

“You are seeing wages rise in the economy, but those wages are trying to catch up to the inflation … our traditional models for analyzing the economy are not working very well right now,” Kashkari said.

That’s not great news for South Dakota markets. 

Farm and ranch production expenditures for the Plains Region, for example, are already up 16% from 2020 to 2021, according to the USDA.

‘A bunch of weird stuff’ happening

Higher interest rates make loans – which businesses use to grow and people use for major purchases like homes and vehicles –more costly. The goal is to allow the supply chain to catch up, Kashkari said.

Kashkari believes inflation is going to come down. But “how long that process takes, I don’t know exactly.”

New technologies for automating labor and improved productivity will help ease the nation’s labor scarcity burden, Kashkari said. And broadband access and remote work are creating new opportunities for people to live and work in rural areas. 

Another complicating factor: workers’ share of annually produced income in the U.S. has declined over the last three decades, he said, despite companies’ high demand for labor. 

“There’s a bunch of weird stuff happening in the economy right now,” Kashkari said. “That makes it hard to neatly say ‘this is purely supply, this is purely demand.’”