By Lina Irawan 
The implications of this research are profound, cutting across economic sectors and challenging conventional political narratives surrounding immigration. While the previous administration prioritized stricter border enforcement and a reduction in irregular migration, often citing concerns over national security and the rule of law, the economic analysis by the San Francisco Fed highlights a less-discussed consequence: the significant contribution of these new arrivals to alleviating critical labor shortages and fueling economic expansion.
The article, “Unauthorized Immigration Effects on Local Labor Markets,” appeared as an “economic letter” on the San Francisco Fed’s website, a publication format used by Federal Reserve banks to disseminate timely economic research and analysis to a broader audience, including policymakers, academics, and the public. These letters typically summarize more extensive, peer-reviewed studies, offering key findings and their policy implications. The letter was authored by Daniel Wilson, a Vice President in the economic research department at the Federal Reserve Bank of San Francisco. It serves as a concise summary of a longer, more detailed study conducted by Wilson in collaboration with Xiaoqing Zhao, an economist at the Federal Reserve Bank of Dallas. Both institutions are highly respected for their rigorous economic analysis, lending significant credibility to the findings.
Wilson and Zhao embarked on a comprehensive data collection effort, compiling detailed information on the arrivals and departures of working-age unauthorized immigrants across the United States. Their unique approach involved leveraging immigration court records, which they contend capture the vast majority of all unauthorized immigration events, particularly those involving encounters with federal agents at ports of entry or within the interior. This methodology allowed them to derive precise “net immigration” numbers for all 3,100 U.S. counties, providing an unprecedented granular view of migration patterns.
Their analysis meticulously focused on two distinct periods characterized by sharply contrasting immigration flows. The first was the Biden era, spanning from March 2021 to March 2024, a period marked by extremely high rates of entry for unauthorized immigrants. This timeframe coincided with a significant surge in border crossings and asylum claims, largely influenced by evolving U.S. immigration policies, geopolitical factors, and economic conditions in migrants’ home countries. The second period examined was the span from March 2023 to March 2024, which the study implicitly models as a period reflecting a "crackdown" or significantly reduced inflows, mirroring the kind of policies seen in prior administrations focused on stricter enforcement. By comparing these two regimes, the researchers aimed to isolate the economic impact of varying levels of unauthorized immigration.
A crucial clarification from the authors addresses the terminology surrounding these immigrants. They emphatically note that "unauthorized immigrants" are not "illegals." This distinction is not merely semantic but legally significant. Typically, individuals encountered at ports of entry by federal agents are issued "notices to appear" (NTAs) in immigration court. This process, often taking one to three years due to substantial backlogs in the immigration court system, means that once they have entered the U.S. and received an NTA, these individuals are legally authorized to remain in the country, at least temporarily, while their cases proceed through the judicial process. This status allows them to live and often work within the U.S. as they pursue asylum claims, seek other forms of relief from removal, or attempt to achieve permanent residency. The authors state that all but a relative few of these individuals do indeed stay stateside during this period, contributing to local economies and communities. This legal nuance is fundamental to understanding their participation in the labor market, as they are not immediately subject to deportation and often possess a strong impetus to find employment to support themselves and their families while awaiting court dates.
To analyze the labor market impact, Wilson and Zhao meticulously matched these immigrant inflows to specific "employment hubs." These hubs are defined as clusters of counties that form cohesive economic regions where workers typically commute to jobs, providing a realistic geographical scope for labor market analysis. They then correlated these inflow numbers with U.S. Census data covering employment for all non-farm workers within the same locales. Furthermore, their analysis incorporated an adjustment for the volume of working-age adults who might have entered the country without being officially encountered by federal agents, thereby enhancing the accuracy and comprehensiveness of their "net workforce inflow" numbers. This rigorous methodological approach aimed to capture as complete a picture as possible of the unauthorized immigrant workforce.
One of the most critical aspects of the study was to address a fundamental economic question: Could a boom market in a specific metro area – perhaps driven by an explosion in home building or the rapid construction of new data centers – explain the rise in employment, rather than the fresh supply of labor? In other words, was it new demand that created the jobs, or the fresh supply of labor that provided enterprises with the workers they previously lacked to push forward on new projects? The authors employed a clever identification strategy to disentangle these effects. They found that unauthorized immigrants consistently tend to settle in areas where people from their home countries are already living, forming established diaspora communities. They cite a compelling example: if 10% of Hondurans in the U.S. are living in Chicago, then roughly 10% of annual new entries from Honduras tend to settle in the Windy City as well. This "ethnic enclave" effect is relatively independent of short-term local economic demand fluctuations. By exploiting this predictable settlement pattern, Wilson and Zhao were able to isolate the impact on total employment in each locale caused mainly by the arrival of immigrants (a supply-side shock), rather than by pre-existing or contemporaneous surges in local demand for labor. This methodological rigor strengthens the causal inference of their findings.
The period they primarily studied, from 2021 to 2023, witnessed an extraordinarily large inflow of unauthorized immigrants, estimated at around 3.5 million individuals settling in the U.S. The authors’ research indicated that roughly 70% of this working-age cohort had been employed in their home countries, and their propensity to work in the U.S. was found to be strikingly similar. The study’s key conclusion is stark: “an increase in the unauthorized local workforce equal to 1% of local employment raises local employment by 0.92%.” This finding suggests a near one-for-one dynamic, meaning that for every 100 unauthorized immigrants entering the local workforce, approximately 92 new jobs are effectively created or filled. This implies that the new workers did not simply displace existing labor but rather provided a critical, missing input that enabled businesses to expand, take on new projects, and meet existing demand in industries that were struggling to find sufficient personnel. These sectors often include physically demanding roles in construction, manufacturing, hospitality, and agriculture, which many native-born workers are less willing to undertake. The immigrants effectively filled these critical bottlenecks, allowing economic activity to proceed and expand.
The CBO backs the Fed study in positing that slow immigration will prove a strong headwind to expanding the U.S. economy
The findings of the San Francisco Fed study are particularly significant when viewed against the backdrop of broader demographic trends and macroeconomic projections. America’s future economic "running room"—its capacity for sustained growth—is highly dependent on the rate of expansion of its labor force. As Wilson and Zhao succinctly put it, “The results suggest that U.S. employment growth is likely to continued downward pressure as long as declines in unauthorized immigrant worker flows continue.”
This perspective is strongly corroborated by the Congressional Budget Office (CBO), the nonpartisan agency responsible for providing economic and budgetary analysis to Congress. The fundamental problem is well-documented and widely acknowledged by economists: Due to a rapidly aging population and persistently low birth rates, the volume of native-born Americans entering the workforce over the next several decades will largely only replace retirees. This demographic reality means that new native-born entrants will contribute little or nothing to the net expansion of the employment rolls going forward, creating a significant demographic drag on economic growth.
In its annual ten-year forecast, "The Budget and Economic Outlook: 2026 to 2036," issued on February 11, the CBO underscored this challenge. The agency highlighted that the U.S. labor force expanded at a sturdy 0.7% pace in the decade preceding the COVID-19 pandemic. Then, during the Biden years, from 2021 to 2024, driven significantly by the influx of immigrants, this growth rate exploded to 1.6% annually, providing the critical labor supply that enabled expansion in sectors like construction, manufacturing, and hospitality—precisely the industries spotlighted by the Fed paper. However, looking ahead to the 2026 to 2034 period, the CBO predicts a drastic deceleration, forecasting tepid increases that, at 0.4% annually, will hover just over half the pre-COVID number and represent only 25% of the robust growth seen during the 2021-2024 rush. Overall, the CBO’s updated forecast projects that the labor force will add a staggering 2.4 million fewer employees in the next decade compared to its estimate from just a year ago, primarily attributing this downward revision to lower net migration assumptions.
The CBO’s report explicitly acknowledges the powerful impact of immigration on the nation’s economic trajectory. It states, “The reduction in net migration slows the growth of the labor force and puts downward pressure on the CBO’s projections. It slows the pace of GDP growth while dampening aggregate consumer demand and slowing the construction of new housing.” This direct linkage of reduced immigration to fundamental economic indicators underscores the critical role that immigration plays, not just in filling specific jobs, but in shaping the overall productive capacity and demand dynamics of the economy. Throughout the report, the CBO stresses the weak labor force outlook as a major reason for its projection that national income will grow at only 1.8% annually from 2027 to 2036, a significant drop from the 2.3% that prevailed from 2010 to 2019. This projected slowdown in GDP growth has wide-ranging implications, from federal tax revenues to the nation’s global economic standing.
Revisiting the wisdom of Milton Friedman
These contemporary economic findings echo the prescient insights of one of the 20th century’s most influential economists, Milton Friedman. In various podcasts and lectures, many of which are available on platforms like YouTube, the legendary Nobel laureate consistently extolled the benefits of immigration. Friedman viewed immigration as a dual force for good: it offered a pathway to a better life for those seeking opportunity in America, and simultaneously served as a primary engine driving the American growth machine.
However, Friedman, a staunch advocate for free markets and limited government intervention, often emphasized a particular kind of immigration that he believed worked best: the "unauthorized" kind. His controversial argument was rooted in economic pragmatism. He warned that if immigrants could immediately receive unemployment benefits, welfare, and other social services, it would create disincentives to work and place a burden on the welfare state. Conversely, he argued that unauthorized immigrants, precisely because they generally cannot access these benefits, have a powerful incentive to work—and work they do, "big time," as the Fed report now confirms.
“The immigrants take jobs that residents of this country are unwilling to take,” Friedman famously asserted. He believed that immigrants often fill essential, physically demanding, or lower-wage roles that native-born workers either shun or for which there simply aren’t enough available. “They’re willing to provide employers with workers of the kind they cannot otherwise get,” he added, highlighting their role in alleviating labor market rigidities and shortages. This perspective aligns remarkably well with the San Francisco Fed’s finding that unauthorized immigrants effectively "create" jobs by providing the missing labor input needed for expansion in critical sectors like construction and manufacturing.
In the years that Friedman spent at Stanford’s Hoover Institution, I had the privilege of speaking with him frequently on a wide array of economic subjects, from the doctor shortage to the fundamental sources of inflation. My interactions with him were always memorable. Usually, I’d leave a message with his assistant, and Friedman, ever the individualist, would call back—collect! The operator’s intonation, “Will you accept the charges from Milton?” would often be met with a chuckle from the great man, who would then start our conversation by good-naturedly joking, “I was most amused that the operator’s referring to me as Milton.”
Friedman was right about a great many things, proving himself uncannily prescient on several critical economic issues. For instance, he famously warned about the dangers of monetizing huge government deficits, arguing that printing money to finance government spending would inevitably lead to inflation. His predictions proved accurate post-pandemic, as massive fiscal stimulus coupled with aggressive monetary easing indeed sent prices soaring, validating his long-held monetarist views. The new Federal Reserve study on immigration now provides compelling empirical evidence that he was also profoundly right on the economic benefits of unauthorized immigration, particularly in its capacity to expand the labor force and drive growth. And to gain that invaluable insight, I didn’t even have to accept the charges this time.