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Fed: Immigrant Wave May Slow Productivity

A new wave of U.S. immigrants over the next century will enlarge the labor pool at a time when a growing proportion of the nation will be retiring, but their arrival may slow growth in U.S. productivity, a Federal Reserve report said on Tuesday. 

The U.S. Census Bureau projects that the U.S. population will grow more slowly over the next century than ever before and age rapidly, with the proportion of those over 65 years hitting record highs. 

This will mean the U.S. will once again become a nation of immigrants, a report by the Boston Federal Reserve Bank said, noting immigration in the past decade had already neared proportions last seen in the early 1900s as Europeans flocked to U.S. shores. The Boston Fed is opening a conference Tuesday morning in Chatham on the economic impact of demographic change. The report is due to be presented at the conference. 

The new wave of immigrants, mainly from Latin America and Asia, and their children, will account for more than half of the increase in the U.S. population over the next century, the report said. 

``These demographic shifts are likely to trigger some major adjustments within the U.S economy -- many of which will play out in U.S. labor markets,'' said Jane Little and Robert Triest, Boston Fed economists and authors of the report. 

From an economic standpoint, the key question is whether the new wave of immigrants, many of whom have relatively lower levels of schooling compared with U.S. natives, will be able to achieve the higher productivity -- output per worker -- needed to meet the living standards expected by the aging population. 

Although economic analysis suggests productivity growth is fastest when population growth is slow, the report said this fails to take into account the past trend of increasing educational attainment. 

``While immigration is projected to make a huge contribution to the growth in the U.S. working age population, this gain comes at a price, since the gap between the average educational attainment of the foreign- and native-born populations is large,'' the report said. 

For policymakers, this means that addressing the educational needs of immigrants, particularly those from Latin America, should be paramount in coming years, Little and Triest argued. ``Given the importance of productivity gains to maintaining or increasing our standard of living as the population ages and the relative size of the work force shrinks, raising U.S. educational attainment heads the set of policy implications.'' 

The U.S. Census Bureau expects the share of the U.S. population over 65 to almost double from 13 percent now to 23 percent by the end of the century. The dependency ratio is likely to double from its level now of 0.2 dependents to each worker to just under 0.4 at the end of this century. 

Immigrants will account for three quarters of the expected growth in the working population over the century and this may help mitigate the dependency ratio's rise, the report said. 

But the key problem remains. 

``To many economists and policymakers, a high dependency ratio raises concerns about how a small work force will provide for a relatively large number of dependents without a decline in the U.S. standard of living,'' it said. 

If the projections for the dependency ratio proved correct, the report says, they would imply a need for a 40 percent gain in labor productivity by mid-2030 just to maintain current living standards. 

``As productivity more than doubled between 1960 and 2000, such a gain should be well within reach if current trends continue,'' it said. ``But, if productivity growth were to revert to a much slower pace, workers' real incomes would stagnate.'' 

One way out would be if workers retired later. But, the report notes, even this would be unlikely to match changes in labor participation seen in the 1960s, particularly the surge in women entering the labor force.