Slowdown in Immigration, Labor Shortages, and Declining Skill Premia

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We document a steady decline in low-skilled immigration that began with the onset of the
Great Recession in 2007, which was associated with labor shortages in low-skilled service
occupations and a decline in the skill premium. Falling returns to high-skilled jobs coincided
with a decline in the educational attainment of native-born workers. We develop and estimate
a stochastic growth model with endogenous immigration and training to account for these
facts and study macroeconomic performance and welfare. Lower immigration leads to higher
wages for low-skilled workers and higher consumer prices. Importantly, the decline in the
skill premium discourages the training of native workers, persistently reducing aggregate
productivity and welfare. Stimulus policies during the COVID-19 pandemic, amid a
widespread shortage of low-skilled immigrant labor, exacerbated the rise in consumer prices
and reduced welfare. We show that the 2021-2023 immigration surge helped to partially
alleviate existing labor shortages and restore welfare.

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