Link to Vamika Bajaj’s Linked In homepage

I am pleased to host another student guest post, this time by Vamika Bajaj. This is the 21st student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

Tightening H1B visa regulations is economically inefficient. H1B visas do not pose a threat to American jobs, but rather, contributes to the growth of the American economy

There is a lot of discussion about tightening immigration regulations in order to make it harder for non-Americans to obtain H1B visas. The H1B visa is one of the most common visas under which foreigners continue to maintain a legal status while working in the United States. These visas are also known as skilled worker permits; most firms help sponsor their foreign employees to obtain an H1B visa.

Currently, H1B visas are granted by a computer-run lottery, where the probability of winning is only about 30%. Despite this, there has been recent discussion about tightening these regulations even further. For instance, two Senators, (Chuck Grassley and Dick Durbin) are campaigning heavily for making it harder to get H1B visas. Their main argument is that H1B visas are given to workers who are stealing jobs from Americans. They are proposing to make it mandatory for all firms offering H1B visas to first attempt to find Americans to fill those job openings before petitioning for H1B visas for their foreign staff. They also want to ban firms from hiring more people under the H1B visa if half of the company’s staff is already non-American.

But the assumption that H1B visas take jobs from Americans is not warranted. That foreigners are working in America does not necessarily imply that they are stealing jobs from Americans. Of course, I am not claiming that not a single American has ever been displaced by H1B workers. However, I argue that the majority of H1B workers are not displacing Americans, but rather that they are adding direct value to their firm and in turn, the American economy as a whole. In fact, according to the economists Giovanni Peri, Kevin Shih and Chad Sparber, “H-1B visa holders contributed between 10 and 25 percent of the aggregate productivity growth that took place in the United States from 1990 to 2010.” Obviously, economic growth in the economy is beneficial to immigrants and Americans alike.

Furthermore, to argue that Americans are being displaced from jobs by H1B workers would be to assume that a certain proportion of the currently unemployed Americans and the current holders of H1B visas represent close substitutes. But if that were the case, private firms would probably only be hiring Americans anyway. There would be no reason for them to deal with the paper work associated with providing employees with visas, if they could get equally good workers without doing so. It is obvious then, private firms have to see something valuable in a worker to sponsor an H1B visa. 

For example, a very large proportion of IT services in the US are provided by Indians. This is because an important part of the Indian economy, education system and infrastructure cater toward developing a labor supply with strong IT skills. This is not to say that Americans would not be able to provide IT skills and services that are at par with those provided by India. However, this does mean that there is a much larger supply of labor that is highly skilled in the IT sector if Indians are added to the mix. Given this, it should come as no surprise that majority of H1B visas are held by Indians. In fact in 2014, 70% of H1B visas were allotted to Indians, the majority of whom worked in IT firms, including Google, Microsoft and IBM. It would y be economically inefficient to make it difficult for these workers to obtain visas, as they add value to the American economy and pay taxes to the American government.

Another common criticism is that companies hire workers with H1B visas not for their skill, but for the lower wages they are likely to accept. In that sense, they would simply be hiring foreigners because it is cheaper. However, there is certainly no merit to the simple version of this argument. Research conducted by the Brookings Institution revealed that 90% of H1B visa holders have a technical background in STEM related fields. (STEM: Science, Technology, Engineering, Mathematics.) The reason that those with STEM related knowledge hold most of these positions is that such specialized positions are harder to fill. This makes it even more likely that H1B workers are being hired for their skill and are not simply displacing Americans by accepting lower wages. Additionally, there is evidence to support that due to this technical knowledge, the average H1B worker with a STEM related bachelors degree actually makes more than an American counterpart who holds a bachelors degree in any field. So it is more a matter of much extra skill for some extra money than it is less money for the same skill. In any case, H1B visa holders are not reducing wages for those who are at the bottom of the heap, but competing with others who are quite well paid. 

Economic efficiency and social welfare are maximized when demand is met with supply without artificial restrictions. A free labor market would correspond to minimal restrictions in the availability of H1B visas. It is in the interest of private firms to hire those employees whose skills they believe will best match the company’s needs. For this reason, it would be economically more efficient not to tighten rules associated with H1B visas.

Update: There is a lively set of comments on this post on Miles’s Facebook page, here.