H1B Economics

Posted by Deepish Thinker on April 07, 2007
Economics, Immigration, US Politics

Last week this year’s allocation of H1B visas was exhausted on the day that applications opened. Tech employers led by Microsoft are loudly demanding an increase in, or better still the elimination of, the H1B visa cap. Unfortunately with the increase in protectionist and anti-immigrant sentiment in Congress a cap increase is unlikely.

H1B visa opponents are obsessed with the idea that H1B visa holders put downward pressure on skilled wages and occupy positions that might otherwise go to Americans. This is an economics 101 type argument. As far as their argument goes the critics are correct.

Figure 1:

US Skilled Labor Market

Consider figure 1. If supply 1 is the total supply of skilled labor (natives plus H1Bs) and supply 2 is the supply of native skilled labor then removing the H1Bs would clearly increase the price of skilled labor. Notice also that the number of Americans holding skilled jobs also increases if the H1Bs disappear (from Native Jobs 1 to Native Jobs 2).So if the H1B visa system were scrapped more Americans would have higher paying jobs. What is not to like?

Unfortunately the world is not so simple. To understand why excluding foreign skilled labor might not be such a hot idea all we need to do is apply a little more economics 101.

Figure 2:

US and ROW Skilled Labor Markets

Consider figure 2. By adding a second set of skilled labor demand and supply curves for the rest of the world we can develop a fuller understanding of the impact of ending the H1B visa program. Since H1B visa workers removed from the US labor pool don’t simply evaporate, the supply of skilled workers in the rest of the world increases and rest of the world price for skilled labor decreases. This increases the skilled labor price differential between the US and the rest of the world. This differential is a nice incentive for US employers to offshore their high skill work.

To put it another way, if US employers can move work to India and employ the same people they wanted to employ in the US for less money, what do you think is going to happen?

The point is that keeping foreign high skill workers out of the US is a very simple minded way of trying to improve the lot of skilled Americans. Long term it is likely to result in a decline in American competitiveness and the large scale export of high skill jobs.