A new Fed study on immigration and economic growth is reshaping the debate over how labor flows affect the U.S. economy. Research from the Federal Reserve Bank of San Francisco suggests that the surge in unauthorized immigration between 2021 and 2024 significantly expanded the labor force, particularly in industries facing persistent worker shortages.
The findings also indicate that the subsequent immigration crackdown beginning in 2024 has reduced workforce growth in key sectors. At a time when the U.S. faces a housing deficit and accelerating demand for AI infrastructure, the labor supply question is emerging as a central economic variable.
What the San Francisco Fed Found
In an economic letter titled “Unauthorized Immigration Effects on Local Labor Markets,” Daniel Wilson of the Federal Reserve Bank of San Francisco and Xiaoquing Zhao of the Federal Reserve Bank of Dallas analyzed immigration court data across more than 3,000 U.S. counties. Their research tracked net inflows of working age unauthorized immigrants during two distinct periods, the high entry years from 2021 to early 2024 and the enforcement period that followed.
The authors estimate that approximately 3.5 million unauthorized immigrants entered the country during the earlier period. Many were encountered at ports of entry and permitted to remain while their immigration cases proceeded. According to the study, most working age arrivals participated in the labor force at rates similar to those in their home countries.
The key conclusion is striking. A one percent increase in the local unauthorized workforce corresponded to a 0.92 percent rise in overall employment in that area. The relationship was close to one for one. Rather than displacing workers, the new arrivals appear to have enabled job growth by filling gaps in construction, manufacturing, hospitality, and other labor intensive industries.
Housing, AI, and the Cost of Labor
The implications extend beyond simple employment figures. Residential construction remains under pressure from a structural housing shortage. Builders depend heavily on trades such as carpentry, framing, and electrical work, occupations where shortages have persisted for years.
The study suggests that tightening immigration flows may constrain residential construction at a critical moment. A smaller labor pool could translate into higher wages, rising project costs, and ultimately higher home prices.
The same dynamic could affect large scale infrastructure tied to artificial intelligence. Data centers, which require specialized construction and electrical work, depend on reliable access to skilled labor. Slower workforce growth may lengthen build timelines and increase capital expenditures for technology firms investing in AI capacity.
The CBO Signals a Broader Slowdown
The conclusions of the Fed paper align with projections from the Congressional Budget Office. In its latest ten year outlook, the CBO warns that slower net migration will weigh on labor force growth and overall GDP expansion.
Before the pandemic, the U.S. labor force expanded at an average annual rate of roughly 0.7 percent. During the surge in immigration from 2021 through 2024, growth accelerated to approximately 1.6 percent. However, for the period from 2026 to 2034, the CBO projects labor force growth of just 0.4 percent annually.
The agency also reduced its estimate of labor force additions over the next decade by 2.4 million workers compared with last year’s forecast. It explicitly links weaker net migration to slower GDP growth, softer consumer demand, and slower housing construction.
Taken together, these projections point to average national income growth of about 1.8 percent annually between 2027 and 2036, well below the pace recorded in the decade before the pandemic.
Revisiting Milton Friedman’s Immigration Argument
The economic logic echoes arguments made decades ago by Milton Friedman. The Nobel laureate maintained that immigration strengthens the U.S. economy when newcomers enter the workforce quickly and contribute to production. He argued that immigrants often take positions that employers struggle to fill, enabling expansion rather than displacing existing workers.
While today’s policy debate differs from earlier eras, the Fed’s findings reinforce the broader principle that labor supply is central to long term growth. The United States faces demographic headwinds as baby boomers retire and native born workforce growth slows. Without sustained labor force expansion, the economy’s capacity to grow becomes constrained.
The new research does not weigh in on border policy or enforcement strategy. Instead, it isolates the measurable economic impact of workforce inflows and outflows. Its conclusion is clear: immigration levels materially influence employment growth and, by extension, national output.
As policymakers consider the balance between enforcement and economic performance, the data suggest that labor availability may be as consequential as tax rates or interest policy in shaping the next phase of U.S. expansion.
