What effect will a tougher US immigration policy have?

The US administration’s immigration policy may impact the labour market significantly, even if its target of one million deportations annually is not reached.

The combination of increased funding for immigration enforcement, as well as evidence of a strong deterrence effect on unauthorised migration, could push net migration down to 0.75 million, a pace not seen since the 1980s. All else equal, this could knock 0.1-0.2 percentage points (ppts) off potential growth. 

In our downside scenario, in which deportations are close to administration targets and visa issuance drops more notably, potential growth is eroded by more than 0.3ppts as net migration falls to essentially zero. 

However, it is unclear whether the economic cost associated with a very tight migration policy might lead to a less aggressive policy implementation over time. 

Undocumented workers make up more than 10% of the workforce in construction and agriculture, so heavily affected firms may begin to push back. As the supply of workers falls, wage differentials could entice more migrants. 

The Fed has refused to be drawn on the implications for policy but will be mindful of how migration interacts with tariff-generated inflation. And, while curtailed immigration weighs on both the supply- and the demand-side of the economy, there is some evidence that migration has effectively acted as a supply pressure valve, suggesting that the net effect is to worsen supply. At a minimum, this complicates the Fed’s assessment of economic slack, such as the breakeven rate of payrolls.