Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersGood morning. The stock market has decided (for now) that a 50bp cut was the right choice. The S&P 500 hit a record high yesterday. But these things take more than one day to shake out. Stay tuned as the news digests. We’re taking a brief break on Monday. Rob is doing a triathlon this weekend, while Aiden frantically looks for housing. We’ll be back in your inbox on Tuesday. Wish us luck: [email protected] and [email protected]. Immigration and the US labour marketDuring the Fed’s post-cut press conference on Wednesday, when asked about the current level of job creation, chair Jay Powell said this:It depends on the inflows. If you are having millions of people come into the labour force, and you are creating 100,000 jobs, you’re going to see unemployment go up. It really depends on what is the trend underlying the volatility of people coming into the country. We understand there has been quite an influx [of migrants coming] across the borders, and that has been one of the things that has allowed the unemployment rate to rise.Powell is broadly right — if the labour force grows because of high immigration, and there is not a commensurate increase in employment, unemployment goes up. But he’s being imprecise. Immigration is difficult to measure. Illegal immigration, by nature, is not well documented. The employer and household surveys used to gauge the labour force do not include immigration status. This all makes it difficult for the Fed, and everyone else, to quantify the impact of immigration on employment. Certainly, US immigration has been historically high recently. In 2019, the Congressional Budget Office estimated that there would be 1mn new migrants, on net, in 2023; in 2023, it revised that number to 3.3mn. The change was driven in large part by a surge in migrants without legal worker status, but also from an increase in asylum seekers and refugees who were given work permits while they await court hearings.That surge has significantly increased the US labour force, as Powell suggested. But the new migrants are also working and being included in employment surveys. So immigration impacts both the numerator and the denominator in the unemployment rate equation. Some estimates suggest that higher unemployment among the migrant population is increasing the overall unemployment rate, but “those effects, given the size of the labour force, are modest — it is most likely only increasing the unemployment rate in the half-tenths”, said Wendy Edelberg of the Brookings Institution, formerly of the Fed and the CBO. Immigration makes it particularly hard to estimate the break-even level of job growth, the number of jobs the US economy needs to create each month to avoid a rise in unemployment. Before the pandemic, population projections from the CBO, the Bureau of Labor Statistics and the Social Security Administration had the break-even job growth at around 100,000. But with the surge in migration and the growth of the labour force, that number is closer to 230,000, according to estimates from Brookings.That has several implications. In 2023, people were positing that the job market was overheating, with an average of 251,000 new jobs added per month. That worry was probably overhyped, given high immigration. But it also means that the current labour market, which added 89,000 jobs in August and 104,000 in July, may be much worse than it appears. The Fed may be alert to this, and it may help explain the decision to make a jumbo 50bps rate cut. The surge in migration was also one of the reasons why the Fed was able to bring inflation back to target. With more workers to throw at a heating- up economy, companies were able to keep meeting high demand. And they were able to do so without increasing competition for labour, which would have increased wage inflation. According to Claudia Sahm of New Century Advisors, the uptick in migration is a problem, but ultimately “a good problem to have”:We have had labour shortages in recent years, and also an ageing population. Immigrants were extremely important in this cycle, helping [the Fed] get inflation down without causing a recession. Solving a labour shortage with more labour is always the way to go.It also may be why we have seen an increase in unemployment in the absence of a recession. New migrants not only grow the labour force, but they also increase aggregate demand for goods and services. From David Doyle at the Macquarie Group:We think we have been in a unique period, in the sense that you have had a more substantial rise in the unemployment rate than you would typically have to hit a recession. When there is a rise in unemployment, with low labour force growth and low immigration, that is indicative that we are having lay-offs and heading for a recession. But when [a rising unemployment rate] is accompanied by strong labour force growth, the economy is still able to expand.Recent data from the US Customs and Border Protection suggests that the level of migration is starting to decline. But the fact remains that we are likely far below break-even job growth. If job creation does not increase in the coming months, the Fed may have to cut rates more aggressively than it currently projects, or tolerate a higher unemployment rate than it has in the past. (Reiter)One good readParanoia.FT Unhedged podcastCan’t get enough of Unhedged? 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