New Peterson Institute Study Highlights Economic Benefits of Latino Immigration

WASHINGTON—The Hispanic community in the United States has contributed significantly to US economic growth in recent decades and will continue to do so over the next 10 to 20 years, according to a new Working Paper published by the Peterson Institute for International Economics (PIIE). The Hispanic contribution to future US economic growth generated through a growing labor force is expected to be more than that of the non-Hispanic population.

Several demographic factors are involved in this impact on economic growth, according to the PIIE authors, Research Analyst Gonzalo Huertas and Senior Fellow Jacob Funk Kirkegaard. For example, Hispanics are the youngest and largest minority group in the United States, putting them on a path toward becoming an increasingly large share of the US labor force. In addition, higher fertility rates than the US average are projected for Latinos, along with increases in net immigration and growing labor force participation rates. The increase in Hispanic labor could contribute around 0.21 percentage point to annual real GDP growth in the United States over the next three decades, if the Hispanic community catches up to the rest of the United States in labor productivity.

The Working Paper, The Economic Benefits of Latino Immigration: How the Migrant Hispanic Population's Demographic Characteristics Contribute to US Growth, presents evidence showing that Hispanic educational attainment is now rapidly converging to the US average. The Hispanic community also exhibits significantly higher levels of opportunity-driven entrepreneurship than does the rest of the US population. Added together, these trends position the Hispanic community to increase its contribution to the US economy in coming decades, with significant positive effects on the overall economic growth rate.

The outsized contribution of Hispanic immigrants to US economic growth also results from the quality of the workforce, not just quantity. Hispanic arrivals have exceeded contemporary native-born Americans and some other migrant groups in their entrepreneurial capabilities and integration into economically relevant parts of the workforce. This phenomenon contrasts with the persistent negative (and now disproven) perceptions of Hispanics as unskilled and occupying low-impact parts of the economy, according to the PIIE study.

Development economists looking at countries' long-term performance have identified "demographic dividends" as sources of sustained growth. The PIIE Working Paper finds that such a demographic dividend is emerging for the US Hispanic community. For communities with growing levels of human capital, a shift in age structure, caused by a rising share of the working age population and lower share of the nonworking age group, presents an opportunity to build on that growth rate—provided that this improvement is combined with lower levels of fertility. Hispanic fertility rates have in fact declined dramatically since the Great Recession, to levels close to the US average, and this trend is likely to persist. Given that Hispanics today are rapidly achieving educational levels similar to those of the rest of the US population, as well as converging towards smaller families, perceptions should similarly conform to reality.

The Working Paper published in February was supported by funding from EY.

Key Takeaways

PIIE WP 19-3
The Economic Benefits of Latino Immigration: How the Migrant Hispanic Population's Demographic Characteristics Contribute to US Growth

LABOR AND ECONOMIC FACTORS

• The increase in Hispanic labor could contribute around 0.21 percentage points to annual real GDP growth in the United States over the next three decades if the Hispanic community catches up to the rest of the country in labor productivity. By 2025, the increase in employed Hispanic labor could contribute more to US GDP growth than non-Hispanic labor.[1]
• The high rate of entrepreneurship among Latinos contributes additional dynamism to the US economy. 
• The main factor driving these developments is the growth of the Hispanic population and the relatively younger composition of the Latino community. Other factors, such as a decline in the historical gap between the Hispanic unemployment rate and the national average, would also contribute positively to this trend.
• These conclusions hold under different assumptions for the future behavior of Hispanic unemployment and labor force participation rates (LFPR). In particular, we expect to see a decline in the Hispanic LFPR (which has historically been higher than the US average) over time, lowering the growth of employed Hispanic labor somewhat. We do not expect Hispanic LFPR to drop all the way to the average US level over the considered period, but even if it did, we would still expect Hispanics to contribute close to half of the growth in employed labor in the United States by 2048.

EDUCATION AND ENTREPRENEURSHIP

• Hispanic high school graduation rates have risen from just over 60 percent to almost 90 percent in the last 20 years, reaching levels just below the currently historically high US average high school graduation rate of 93 percent. But Hispanics also have ground to cover to catch up with the US average in attaining higher education degrees.
• The US economy has exhibited gradually declining economic dynamism in recent decades; the share of new firms being created each year has fallen in a trend accelerated after the Great Recession. But foreign-born and Hispanic populations have become engines of US entrepreneurship, especially since the Great Recession. The foreign-born share of ownership of firms founded in the last two years is one in five.

DEMOGRAPHICS

• The US Hispanic community is on the cusp of a demographic dividend, as fertility levels decline, the share of working age people rises, along with educational attainment.
• US fertility levels are at a historically low total fertility rate (TFR) of less than 1.75 children per woman, while the Hispanic TFR has declined from 3 in 2007 to just over 2 (i.e., below replacement rate for the first time) in 2017. Thus the recent decline in US fertility levels, especially among Hispanics, has been more rapid than the US Census Bureau has estimated using otherwise conservative assumptions. This implies that recent standard US population forecasts might be biased upwards.
• Migration to the United States from Mexico in recent years has leveled off at 150,000 annually, below levels before 2011 and significantly below levels assumed by the Census Bureau. The data suggests that the United States has passed "peak Hispanic inward migration," while Asia and Africa are becoming more important sources of migrants to the United States.
• Because of these factors, the US Hispanic population is projected to reach 71.5 million, rather than the 77.5 million projected by the Census Bureau for 2030, and about 103 million instead of 119 million by 2060.

Note

1. Again, not accounting for differences in labor productivity or average hours worked. Another way to say this is that we consider only the growth in laborers, not in the effective quality-adjusted labor supply.