"If the administration follows through on its goals of deporting 4 million people over four years:
There will be 3.3 million fewer employed immigrants and 2.6 million fewer employed U.S.-born workers at the end of that period.
Employment in the construction sector will drop sharply: U.S.-born construction employment will fall by 861,000, and immigrant employment will fall by 1.4 million.
The deportations will eliminate half a million child care jobs." - economic policy institute
How does the model intrepret this? Even if the total is half of this projection, there will be less available workforce participation and won't this INCREASE wages as there is a potential shortage of workers?
Good question and the child care example is a good one. A couple of thoughts:
1. Technical thought - wages in some sectors may go up, but the overall reduction in immigration will result in less business formation/dynamism that will push economy-wide wages down (or they will not grow as much).
2. With falling availability of child care, it will potentially encourage workers to actually skip work and stay home to take care of children. Similarly, this may also reduce business formation as people will choose to undertake less risks (I can choose to open a store and pay for child care, or I can choose to stay at home and take care for the child - if the former becomes costlier, the latter option becomes more attractive).
The main issue is that a falling supply of workers ends up also destroying demand for workers. Most labor demand comes from monopoly/oligopoly type firms so wages are relatively fixed by market structure. High growth economies with immigration see more innovation, which strengthens worker's bargaining positions, pushing wages up.
I read another interesting article on this from Derek Thompson substack.
One argument he makes is that inflation is not going up as much as expected, amongst other things, because the Fed is keeping interest rates up.
Reminds me of a friend of mine, who had a really nice figure, but was always dieting. I once said to her that I didn't understand why she was always on a diet, given her very nice figure. She replied, "and I have a great figure because I watch what I eat."
Another person keeping track of tariffs and demonstrating how they are continuously being changed is Joey Napolitano, also on substack. Tariffs are shifting frequently, sometimes being lifted soon after being announced, this mitigates their overall impact. I mean, who can keep track anymore?
Regarding the changing tariffs, there's also one more wrinkle - if the tariffs get rescinded via a court order and the collected tariffs have to be given back, it would create even more chaos. To some extent, firms might also be factoring this into account.
Quick question for you please. The Bank of England is expected to cut interest rates this year despite an inflationary trend, apparently to estimulate economic growth.
Looking at the UK BoE mission statement, their primary goal is price stability (i.e. inflation). The US is unique because the Federal Reserve treats both price stability and labor market performance as primary goals, so the Fed can choose policies that favor one or the other. In theory, the BoE should be more focused on inflation.
I don't know how recent market rents have developed in the UK (it appears rent growth over the last 12 months based on market data is 2.8%, while the inflation measure in the UK has it at 6.4% - https://www.zoopla.co.uk/discover/property-news/rental-market-report/), but the official inflation measure may naturally start falling back as market rents feed into the official UK measure.
The BoE might be anticipating this and thus planning to cut. I would be surprised though if more than 1 cut were to occur given the other components of the UK inflation do appear high too.
Great article for catching up on recent debates! I don't pay enough attention to monetary policy as I am hyper focused on labor market, fiscal, and demographic policies... So it was a nice, simple read to catch up with excellent points on the tariffs.
Also, point 4 is incredibly frustrating. People aren't considering the lagged implications in the supply chain. Businesses bought a lot of inventory in anticipation of these tariffs, and as that inventory depletes, prices will increase. The full effects are going to lag behind.
Yup - I think this is a very important note. Since we tend to see prices being sticky, firms themselves don't really know what to do. Will the tariffs stick or will they be retracted? It's a complex business decision.
Separately, I also didn't pay as much attention to monetary policy when I was doing my PhD (found trade and labor a lot more interesting!). But I guess current times forced me to read a lot more about it :D
I think there were whispers that monetary policy existed in our department, but that may be a legend. Our department mainly cared about fiscal policy, labor, and trade.
I'd be interested to hear some information on why the Taylor rule was so far from the Fed rate from 2022-2023, and what reasons the Taylor has for being so high there
The main reason was high inflation. Since the Taylor Rule is agnostic as to why inflation spikes, it just wants to bring it down to target as soon as possible. The Federal Reserve, and quite a bit of economic research, suggested to look past some of the inflation caused by supply disruptions and allow for inflation. The idea was that it would come down once some of the initial causes went away (Covid restrictions disappearing).
Given that inflation did fall relatively rapidly with interest rates well below what the Taylor Rule suggested, it does appear some of these factors were not permanent, implying that looking past the inflation was most likely the correct decision.
"If the administration follows through on its goals of deporting 4 million people over four years:
There will be 3.3 million fewer employed immigrants and 2.6 million fewer employed U.S.-born workers at the end of that period.
Employment in the construction sector will drop sharply: U.S.-born construction employment will fall by 861,000, and immigrant employment will fall by 1.4 million.
The deportations will eliminate half a million child care jobs." - economic policy institute
How does the model intrepret this? Even if the total is half of this projection, there will be less available workforce participation and won't this INCREASE wages as there is a potential shortage of workers?
Thoughts?
Good question and the child care example is a good one. A couple of thoughts:
1. Technical thought - wages in some sectors may go up, but the overall reduction in immigration will result in less business formation/dynamism that will push economy-wide wages down (or they will not grow as much).
2. With falling availability of child care, it will potentially encourage workers to actually skip work and stay home to take care of children. Similarly, this may also reduce business formation as people will choose to undertake less risks (I can choose to open a store and pay for child care, or I can choose to stay at home and take care for the child - if the former becomes costlier, the latter option becomes more attractive).
The main issue is that a falling supply of workers ends up also destroying demand for workers. Most labor demand comes from monopoly/oligopoly type firms so wages are relatively fixed by market structure. High growth economies with immigration see more innovation, which strengthens worker's bargaining positions, pushing wages up.
Very interesting article, thank you.
I read another interesting article on this from Derek Thompson substack.
One argument he makes is that inflation is not going up as much as expected, amongst other things, because the Fed is keeping interest rates up.
Reminds me of a friend of mine, who had a really nice figure, but was always dieting. I once said to her that I didn't understand why she was always on a diet, given her very nice figure. She replied, "and I have a great figure because I watch what I eat."
Another person keeping track of tariffs and demonstrating how they are continuously being changed is Joey Napolitano, also on substack. Tariffs are shifting frequently, sometimes being lifted soon after being announced, this mitigates their overall impact. I mean, who can keep track anymore?
Yup - good analogy.
Regarding the changing tariffs, there's also one more wrinkle - if the tariffs get rescinded via a court order and the collected tariffs have to be given back, it would create even more chaos. To some extent, firms might also be factoring this into account.
Quick question for you please. The Bank of England is expected to cut interest rates this year despite an inflationary trend, apparently to estimulate economic growth.
https://moneyweek.com/economy/inflation/inflation-forecast-where-are-prices-heading-next?
Is this normal? I thought central banks only concerned themselves with keeping inflation under control.
Looking at the UK BoE mission statement, their primary goal is price stability (i.e. inflation). The US is unique because the Federal Reserve treats both price stability and labor market performance as primary goals, so the Fed can choose policies that favor one or the other. In theory, the BoE should be more focused on inflation.
I had a high-level look at the recent inflation report (https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/june2025) and some of the inflation measure issues are similar to the US. A lot of the elevated inflation appears to be driven by housing cost, mainly rents.
I don't know how recent market rents have developed in the UK (it appears rent growth over the last 12 months based on market data is 2.8%, while the inflation measure in the UK has it at 6.4% - https://www.zoopla.co.uk/discover/property-news/rental-market-report/), but the official inflation measure may naturally start falling back as market rents feed into the official UK measure.
The BoE might be anticipating this and thus planning to cut. I would be surprised though if more than 1 cut were to occur given the other components of the UK inflation do appear high too.
I’m glad the Fed is an independent entity. The Trump / Powell hard hats interview on live TV was an SNL skit.
Thanks for compiling interesting information on topics that matter.
That interview was something special haha
Great article for catching up on recent debates! I don't pay enough attention to monetary policy as I am hyper focused on labor market, fiscal, and demographic policies... So it was a nice, simple read to catch up with excellent points on the tariffs.
Also, point 4 is incredibly frustrating. People aren't considering the lagged implications in the supply chain. Businesses bought a lot of inventory in anticipation of these tariffs, and as that inventory depletes, prices will increase. The full effects are going to lag behind.
Yup - I think this is a very important note. Since we tend to see prices being sticky, firms themselves don't really know what to do. Will the tariffs stick or will they be retracted? It's a complex business decision.
Separately, I also didn't pay as much attention to monetary policy when I was doing my PhD (found trade and labor a lot more interesting!). But I guess current times forced me to read a lot more about it :D
Ha, I hear you! I think my comment was subconsciously built on Acemoglu's network papers, which I am familiar with. I actually found a brand new interesting paper on this: https://www.econstor.eu/bitstream/10419/320138/1/cesifo1_wp11917.pdf
I think there were whispers that monetary policy existed in our department, but that may be a legend. Our department mainly cared about fiscal policy, labor, and trade.
I'd be interested to hear some information on why the Taylor rule was so far from the Fed rate from 2022-2023, and what reasons the Taylor has for being so high there
The main reason was high inflation. Since the Taylor Rule is agnostic as to why inflation spikes, it just wants to bring it down to target as soon as possible. The Federal Reserve, and quite a bit of economic research, suggested to look past some of the inflation caused by supply disruptions and allow for inflation. The idea was that it would come down once some of the initial causes went away (Covid restrictions disappearing).
Given that inflation did fall relatively rapidly with interest rates well below what the Taylor Rule suggested, it does appear some of these factors were not permanent, implying that looking past the inflation was most likely the correct decision.
Federal Reserve has literally been WRONG about Everything. What are u talking about?