What the Yale Budget Lab Got Wrong About Immigration and Productivity
If you were told that the Yale Budget Lab had studied the economic consequences of Donald Trump’s immigration policies, you would probably be able to guess that it would find the reduction in immigration those policies brought about was harmful.
The exact details might be harder to surmise without any further information, but there’s just about zero chance the Yale Budget Lab would produce a study that discovered unforeseen benefits from Trump’s policies toward immigration. For one thing, immigrants are holy beings in the liberal imagination, almost wholly responsible for the miraculous strength of the U.S. economy throughout our history. For another, Trump is a sort of devil figure for liberals, so that nothing good can come of his words and works.
The Yale Budget Lab, in particular, has been a hotbed of negative assessments of Trump’s policies. It sees the One Big Beautiful Bill as worsening the federal deficit, raising interest rates, and slowing growth. It predicted large increases in consumer prices from the tariffs. Not everything the Yale Budget Lab produces is explicitly anti-Trump, but nothing it produces could be reasonably interpreted as an endorsement of a Trump policy.
So you will not be surprised to hear that the Yale Budget Lab’s new report on the Trump administration’s immigration reforms finds that they “will make America less dynamic and productive for decades to come.” The headline on the lab’s site is even blunter: “Lower Immigration Means Lower Productivity Growth.”
The report’s basic argument is that lower immigration will result in fewer new businesses being launched in the United States. And since young businesses are a crucial source of productivity growth, this will result in lower productivity over time. Even if the results in any given year are small, the cumulative effect over time adds up. What’s more, the “damage” is already done. Even if the reduction is reversed after Trump departs, a few years of lower growth have a lasting drag. “Economywide productivity is lower by between 0.25% and 0.44% in 2052, and productivity remains lower even in 2075,” the lab’s summary explains.
Fortunately, none of this is likely to turn out to be correct. It’s very likely that the reverse is true. Lower immigration will increase productivity by encouraging firms to invest in innovation instead of relying on cheap labor, and this is likely to swamp any effect of lower business formation. What’s more, the lower business formation effect they find is likely to turn out to be significantly overstated because the economy and the U.S. population will adapt to the lower new immigration rates.
History Tells a Different Story
Let’s start with a bit of history. The restrictive immigration reforms adopted by the U.S. in 1921 and 1924 had even larger effects than anything Trump has done so far. What happened next was not a decline in productivity growth but a surge. Manufacturing productivity grew between five and 5.5 percent in the decade from 1919 to 1929, far above anything seen in prior or subsequent decades. A big driver of this was investment in technological innovation: widespread factory electrification, the introduction of efficient moving assembly lines, mechanization, and improved mass production techniques.
View of two men at work in a Ford assembly line in a factory in Detroit, Michigan, in May 1923. (Library of Congress/Interim Archives/Getty Images)
In other words, businesses responded to the reduced supply of immigrant labor through what economists call “capital deepening.“ When labor was scarcer, businesses turned to capital investment to power their growth. And the result was an acceleration of productivity rather than a slowdown.
If you dig deep enough into the Yale Budget Lab’s report, you will find that they actually admit they are ignoring this possibility. They describe their findings as the result of a “partial equilibrium” model, which is to say a model that assumes the only thing that changes in the economy is a reduction in the number of immigrants and the businesses they start. There’s no room for a dynamic response.
The same limitation applies to their long-run effects. They assume that a reduction in immigration permanently reduces the size of the U.S. population. Current native population trends are projected to continue, so the population is significantly smaller three to five decades from now. But that’s not what happened in the United States. A few decades following the immigration reforms of the 1920s, U.S. population growth exploded higher—the event known as the “baby boom.“
The best economic work on why the baby boom occurred comes from the late Richard Easterlin. He found that the lower supply of young workers improved the prospects of young men, which led to earlier marriage and larger families. Crucially, reduced immigration helped fuel the baby boom by preventing an influx of foreign workers from meeting the rising demand for labor. In other words, population itself is cyclical: a relative decline in the labor supply induces behavioral changes that eventually increase the labor supply. What’s more, reduced immigration also made things like housing more affordable by cutting back on the number of workers bidding for housing, although Easterlin doesn’t emphasize this angle. And the investment boom of the 1920s also fueled the baby boom. The increased productivity of workers led to higher demand for workers, contributing to better wages and career paths and therefore earlier family formation and larger families.
The Business Formation Claim Is Shaky
Even the Yale Budget Lab’s core premise—lower immigration means fewer new businesses—rests on shaky foundations. It is based on a study of new businesses started between 2005 and 2010, a period which included incredibly loose credit conditions and a housing construction boom. New business formation, especially small immigrant-founded firms, depends heavily on access to credit. The 2004-2007 era was the most permissive lending environment in American history. Immigrant entrepreneurs benefited disproportionately because low-documentation lending was precisely the product that served people with thin credit histories and informal income. What’s more, it’s likely that many of the businesses formed were related to the construction boom. Simply projecting business formation trends from this period forward to 2074 seems naive.
And, again, there’s the problem of static analysis. Here the problem is two-fold. One, it assumes that the native population does not respond to lower immigrant business formation by increasing its own business formation. But the idea that Americans would ignore the opportunities that immigrants would have otherwise have taken is unrealistic. Two, it assumes no improvement in the quality of immigrants who do arrive despite restrictions. But the immigrants who arrive under aggressive enforcement and restrictionist visa policy are a different selected population than immigrants who arrived under Trump conditions. Legal immigrants who navigate the current system may actually have higher entrepreneurship propensities than the 2005-2010 average because they are more strongly selected for human capital and economic capacity.
A Theoretical Exercise, Not a Practical Forecast
The report takes no account of the idea that the U.S. appears to be entering into an era in which technology adoption is likely to dominate the effects of demographics when it comes to growth and productivity. That is, the economic cycle more closely resembles the dynamism of the 1920s than the secular stagnation of the mid-aughts and 2010s. That will make the immigrant contribution to productivity growth a rounding error compared to the contribution of capital investment and technological innovation.
Finally, Trump’s policies have focused heavily on ending the chaotic Biden-era border surge, a wave very different from the earlier periods the report draws upon. The Biden border crisis migrant cohort was very different from immigrant groups who arrived in the 1980s and 1990s and were starting businesses in the first decade of the 2000s. Winding down that surge is unlikely to trigger the productivity damage they project. History and common sense suggest the opposite: tighter labor markets can push America to invest, innovate, and grow more productive.
The Yale Budget Lab’s report is not bad economics. It’s just not a good guide to the future because it intentionally overlooks how the economy is likely to respond to the changes it studies. It’s a theoretical exercise rather than a practical forecast, something it admits in the fine print but conceals in its dire headline and summary.
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