Instead of increasing jobs for locals, restrictions spur offshoring, suggests research by US think tank.
President Donald Trump’s restrictions on high skilled H-1B workers instead of increasing employment of American workers are causing US multinationals to switch jobs offshore, particularly in India, Canada, and China.
This is the key finding of a new research paper by Cambridge, Massachusetts based private nonprofit National Bureau of Economic Research based on evidence from the H-1B program.
Titled, “How Do Restrictions on High-Skilled Immigration Affect Offshoring?” the paper by Britta Glennon of the Wharton School says skilled immigration restrictions may have secondary consequences that have been largely overlooked in the immigration debate.
“Multinational firms faced with visa constraints have an offshoring option, namely, hiring the labor they need at their foreign affiliates,” she notes.
“If multinationals use this option, then restrictive migration policies are unlikely to have the desired effects of increasing employment of natives, but rather have the effect of offshoring jobs,” Glennon writes.
Combining visa data and comprehensive data on US multinational firm activity, Glennon found that “restrictions on H-1B immigration caused foreign affiliate employment increases at the intensive and extensive margins, particularly in Canada, India, and China.”
H-1B rejection rates have more than tripled since President Trump signed the Buy American and Hire American Executive Order in early 2017, she noted.
While critics of the H-1B program argue that skilled immigrants displace native-born workers and drive down their wages, business leaders have decried both Trump’s recent as also long-standing restrictions on high-skilled immigration.
They argue that shortage of workers with specialized skills has negatively affected the competitiveness and innovation of high-tech firms and of the US economy, Glennon noted.
For instance, in Congressional testimony in 2008, Bill Gates warned that unless the US expanded its H-1B program, it would be “at risk of losing its position of technological leadership”.
Eric Schmidt, speaking at MIT’s Computer Science and Artificial Lab, said that limits on the H-1B visa program “make it more difficult for US companies to remain competitive.”
The paper provides the first empirical evidence to support the hypothesis that restrictions on high-skilled immigration cause the offshoring of skilled jobs, Glennon writes.
The findings of the paper have important policy implications, she writes noting that “the offshoring of jobs appears to be an unforeseen consequence of restricting skilled immigration flows.”
“Even if H-1B immigrants displace some native workers, any policies that are motivated by concerns about the loss of native jobs should consider that policies aimed at reducing immigration have the unintended consequence of encouraging firms to offshore jobs abroad.”
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Examining the heterogeneity of H-1B petition filings by firm, industry, and country, Glennon found the median H-1B visa petition is for an Indian worker in a computer- related occupation.
Computer-related occupations accounted for 69% of H-1B petition filings in 2017, and 85% of H-1B petition filings were for workers from India or China.
These results suggest that the firms most impacted by constraints on H-1B visas would be firms dependent on computer-related workers, Glennon wrote noting this could see large increases in foreign affiliate employment in India and China.
Glennon’s data includes US multinational firms only and excludes domestic firms, foreign multinational firms, or the Indian outsourcing firms who are the largest H-1B applicants in the US.
Based on median compensation alone, Indian outsourcing companies hire a very different set of workers than US multinational firms, she noted.
The largest countries of origin for H-1B visa holders are China and India while many of the prominent examples of companies opening foreign affiliates abroad in response to H-1B restrictions are concentrated in Canada, Glennon noted.
These facts suggest that the expansion of foreign affiliate activity could operate through two channels, she writes.
First, a direct channel, whereby multinationals expand foreign affiliate activity in countries where the raw human capital they need is located such as India or China.
Second, an indirect channel, whereby multinationals expand foreign affiliate activity in countries like Canada where it is easy to open foreign affiliates housing immigrants from other countries.
India, China, and Canada were not the only countries affected in response to immigration restrictions. But US multinationals appear to have increased the share – not just the levels – of their total employment and patenting to these three countries, Glennon concluded.