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Impacts of H-1B visa reductions on economic growth

November 29, 2018
By: Robert Ksiazkiewicz

Over the last two years, foreign-born workers have faced  increased difficulty in obtaining work visas, a condition that could lead to negative impacts on the future economic prosperity of the United States. Under the Trump administration, there also has been a reduction in the cap for H-1B visas from 85,000 in 2016 to 65,000 this year. In addition to a reduction in the number of H-1B visas offered, human resource professionals report that the U.S. visa application process has become more difficult due to increased complexity, longer preparation times, and increased requests for additional information, according to a survey by Envoy

The cap reductions have driven public discourse regarding the policy’s economic impact. Proponents of the reductions argue that H-1B visas reduce opportunities for domestic-born workers. Critics of these policies contend that generally domestic workers actually benefit from federal policies that attract skilled foreign-born workers. Over the past several months, three research articles looked to measure the impact that these immigration policies can have and have had on domestic workers and economic growth.

In High-Skill Immigration, Innovation, and Creative Destruction, Gaurav Khanna and Munseob Lee examined the impact of hiring foreign workers on a firm’s productivity, innovation, and revenue growth from 2006 to 2015. At the firm level, the authors matched Labor Condition Applications (LCAs) to identify firms that received H-1B certification with Nielsen Retail Scanner Data to assess the impact on the firms’ performance. The authors found that an increase in the number of H-1B workers was associated with an increase in both productivity as well as an increase in innovation as measured by product reallocation rates as reported by the Nielsen Retail Scanner Data. The findings were strongest for firms in the software industry. These findings were found regardless of the firm’s R&D expenditure, size, or revenue share. The researchers also found that an increase in product reallocation is strongly associated with higher firm revenue growth.

In a working paper, How Do Restrictions on High-Skilled Immigration Affect Offshoring? Evidence from the H-1B Program, Britta Glennon examined the consequences of restrictions on the hiring of high-skilled by multinational firms. Glennon wanted to see if restrictions on H-1B visas would lead multinationals to offshore tech jobs to their foreign affiliates. To assess for the impact of restrictions on H-1B visas, Glennon reviewed data from 2004 after a significant drop in the H-1B visa cap as well as years when multinational firms had high levels of demand for H-1B visas that were not met due to the cap.

Using firm level H-1B visa data linked with Bureau of Economic Analysis data on U.S. multinationals, Glennon found that both levels of analysis yielded the same result: foreign affiliate employment increased as a direct response to increasingly stringent domestic restrictions on H-1B visas. These results were most pronounced among R&D intensive firms in industries that could be easily offshored. The countries that benefited from these restrictions the most were China. Canada, and India. For China and India, they saw an increase in the amount of activity/employment at the foreign affiliates of U.S. multinationals because each country has a large number of skilled workers. In contrast, Canada benefited from U.S. restriction because of the country’s more relaxed immigration policy as well as the proximity of foreign affiliates to their U.S. headquarters.

In The Unintended Selection Effects of Cutting the H-1B Quota, a group of authors explored how changes in H-1B policy affect the quantity and characteristics of workers entering the country. Based upon a review of existing literature and datasets, the authors found that reductions in the cap on H-1B workers have particularly hindered the employment of the highest skilled foreign-born workers (as measured by wage)  and have not led firms to hire more Americans. The wage quintiles were based upon the H-1B wage distribution from the pre-2004 period when firms were effectively unconstrained by H-1B caps due to the high limits.  

When the H-1B cap was reduced from 195,000 in 2001-03 to 85,000 after 2004, the authors found the restrictions in H-1B visas actually reduced the ability for firms to attract ‘the best and brightest’  by deterring workers with the highest earnings potential from entering the U.S. labor market. After the cap reductions were put in place, the number of new H-1B workers from the highest wage quintile was nearly 50 percent lower than it would have been in the absence of H-1B restrictions. While the number of high-income workers decreased dramatically, the number of new H-1B workers in the median wage quintile is unchanged.