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This edition was written by Chesapeake Dowdy, Chase Parry, Zixun Tan, and David Wessel
Using a new dataset covering 38 OECD countries from 1990 to 2024, Gaetano Basso of Banca d’Italia and Mitali Mathur and Giovanni Peri of the University of California, Davis, find that immigration from non-OECD countries predicts faster GDP-per-worker growth, primarily through higher investment. An increase in immigrants equal to 1% of the initial adult population is associated with 1.57 percentage points more growth in capital per worker and 1.2% faster GDP-per-worker growth within five years. At the 10-year horizon, those estimates rise to 2.87 percentage points and 1.9%, respectively. The positive long-run results are concentrated among high-skilled immigrants: their arrival predicts greater human capital, productivity, and capital per worker, while low-skilled immigration has no statistically significant relationship with productivity or investment. Native population growth also has no comparable association with productivity, suggesting that the results do not simply reflect an increase in the number of workers. Overall, the authors argue that immigration can ease labor-market bottlenecks, promoting investment and firm creation. Although the results cannot capture how gains or losses are distributed within countries, the authors conclude that immigration likely supported labor-productivity growth as native population growth slowed or turned negative.
Pension funds are among the largest holders of government and corporate debt, and their long investment horizons have traditionally made them a stable source of demand for bonds. Ding Ding of MIT and co-authors find that pension funds in the U.S., advanced European economies, and emerging markets have shifted away from fixed-income securities and toward mutual funds and alternative assets. In the U.S., fixed-income holdings fell from almost 40% of pension assets in the 1980s to around 10% in 2023, while mutual fund holdings rose from near zero to almost 30%. For advanced European economies with sufficiently detailed data, total bond exposure fell even after including bonds held through mutual funds, indicating that the rise in mutual fund holdings was not simply a shift from direct to indirect bond ownership. The authors then examine whether declining interest rates help explain the change. Within countries, lower domestic government bond yields are associated with smaller bond shares and larger allocations to mutual funds and foreign assets, consistent with a search for yield. The investors replacing pension funds in debt markets may be more likely to pull back during periods of stress, making yields more volatile, but also more willing to buy when yields rise, limiting the increase in borrowing costs when new debt is issued.
Examining Quebec’s 1997 launch of a universally available, heavily subsidized childcare program for children ages 0-4, Michael Baker of the University of Toronto, Jonathan Gruber of MIT, and Kevin S. Milligan of the University of British Columbia find that mothers with eligible children were 5 percentage points more likely to work than similar mothers in other provinces of Canada. This increase in labor supply persisted for at least 10 years after their youngest child aged out of subsidized care. The authors estimate that making subsidized childcare available raised mothers’ earnings at age 50 by 27%. The gains reflected greater employment and work experience, more hours, occupational upgrading, and higher wages within occupations. The resulting increase in tax payments and decline in employment-insurance and social-assistance benefits are estimated to offset 75% to 117% of the program’s upfront costs in present value.
Q: "You’ve said repeatedly you have no tolerance for inflation, and yet we are seeing above target inflation repeatedly for five years and through your term so far. And, sure, you have no magic wand, but you have not taken action. You just gave us a little peek at your reaction function as well. You said that if underlying inflation is rising that you would tend to think that you might need to tighten. And with the exception of the most recent inflation print, that is what we’ve been seeing. So could you explain what you mean by no tolerance for inflation, and what you plan to do about it?"
"I hear from you what I hear more broadly from households and businesses, impatience. Deliver it already,” said Federal Reserve Chairman Kevin Warsh. "This is not an excuse. This is a fact. This FOMC, this Board, has been in business for eight and a half weeks. The patience – the impatience that households and businesses feel have been going on for 63 months. We are on the job. We will deliver. We are focused like a laser on making sure we can do it. But the suggestion that we’re going to be able to do it with our magic wand is one I want to disabuse you and everyone else of. But the discussion in the last two days gives me more confidence even than I had eight and a half weeks ago.”
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