For decades, Germany was the strongest and largest economy in Europe; it was often called the “engine of growth” for the European Union. Today, that engine is beginning to sputter. Businesses in Germany are finding it increasingly hard to hire qualified employees, preventing further expansion.
The reason is simple but massive: The German population has, for a long time, been shrinking and getting older, creating a severe shortage of skilled workers in the workforce. Right now, there are more than a million vacancies across the German economy; in the areas with the lowest unemployment, 60 percent of businesses report that their biggest problem is finding enough skilled workers. Many economists are beginning to wonder if the shortage of skilled workers will plunge Germany into another recession.
The problem is worsening. Researchers at the Bertelsmann Foundation found that by 2060, Germany will experience a 36 percent decline in the size of its labor market, resulting in massive labor shortages for firms all around the country.
In an attempt to forestall this growing crisis and stave off the collapse of the industrial sector, the German cabinet is drafting legislation to encourage skilled immigration from other countries within the European Union and around the world. Like many developed nations, Germany has realized that high-skilled immigration is essential to fulfilling its labor needs. It is time for the United States to do the same.
Is the United States on the Same Path?
Although the American situation is not nearly as severe as that of Germany, there is evidence to suggest that the United States is also suffering from a shortage of skilled workers.
In 2016, there were 13 STEM jobs posted online for every unemployed STEM worker, leaving nearly three million more jobs than professionals capable of filling them. In the computing and IT sectors alone, the Economist reported that there will be more than a million unfillable vacancies by 2020, and in manufacturing the number of skilled vacancies is projected to top 2.4 million, costing $2.5 trillion over the next decade.
William Kerr, a professor at the Harvard Business School, concluded from this shortage that “if we want to grow our economy and expand and pursue all of the opportunities that we have in front of us, then we need to be thinking about how to leverage immigration.” In order to respond to the growing deficit of skilled workers in the American workforce, the H-1B visa program should be expanded and improved.
Existing Pathways: The H-1B Program
The H-1B program is America’s largest guest-worker visa program. It is firm-led; companies find skilled workers that they are interested in employing and then file visa applications for them. If the application is approved, those selected for the program may come live and work in the United States for three years, or six if a visa extension is obtained.
However, the program is currently capped at 85,000 visas — despite receiving more than three times that number of requests within the first week of applications being open. Once that first week is over, a random lottery is used to select the winners from the pool, leaving more than 150,000 skilled workers without the ability to immigrate.
This cap on H-1Bs is problematic because the majority of the available evidence suggests that skilled immigration strengthens the American economy.
Research has shown that college-educated immigrants increase innovation, as measured by patenting activity, within the host country. In fact, skilled immigrants produce twice as many patents as their native counterparts. The H-1B process self-selects for ambitious individuals who are unafraid of taking risks. It thus makes sense that these immigrants would engage in more innovative activity than the average domestic worker.
Patent activity alone can be misleading, though, and Kerr cautioned that immigrants are not simply smarter than native workers; rather, “If you control for a person’s field of study and the level of degree that they have attained, what you find is that you can explain most of the difference between immigrants and natives.” He continued that a higher percentage of H-1B workers are in STEM fields where patenting activity is higher, which is why the effect on patenting seems higher for immigrants than for natives when examined in aggregate. However, despite these caveats, it cannot be denied that immigrants do contribute to productivity and innovation within the United States.
Those increases in productivity and innovation benefit everyone. Professor Giovanni Peri of UC Davis suggests that a one percentage point increase in skilled immigration as a share of total employment boosts wages for both skilled and unskilled native workers by seven and three percentage points respectively.
As Peri explained in an interview with the HPR, “because [high-skilled immigrants] increase the size of the pie by creating higher productivity in companies, they increase the opportunities for American workers to be hired in other types of functions and jobs created by those companies.” Essentially, foreign skilled laborers increase the demand for American workers.
And the effect is larger than one may initially think. In an interview with the HPR, professor Volker Grossman of the University of Fribourg in Switzerland remarked that “higher income per capita can be related to the immigration of high-skilled workers, and the effect is actually greater than that from free trade. Usually economists promote free trade, but it seems that if you control for immigration, the effect actually vanishes, so the benefits can be attributed to the immigration of high-skilled workers.”
Where is the Catch?
Although most evidence suggests that H-1B workers benefit the American economy, not all of the implications of expanding the program are positive. Perhaps the most common reason to be wary of the H-1B program is the fear that immigrants will take American jobs or depress wages for American workers. However, that fear is largely unfounded.
Peri explained that, on average, H-1B workers have higher wages than natives because they are hired for jobs where there is high demand for and low supply of qualified individuals. In conjunction with his research about the positive spillover effect on wages from hiring skilled immigrants, this suggests that skilled immigration complements rather than undermines the American labor force.
This is not to suggest that there is no harm to American workers, at least in the short term. Kerr conceded that “there are certainly some places where pain is felt.” He explained that “if the Boston area was to suddenly receive an influx of high-skilled migrants, there would be some people who are in the local workforce, skilled natives, who might not have as strong job opportunities in the immediate future.” Some people could lose their jobs or not get a job because a higher-skilled H-1B employee takes their place.
Kerr concluded, however, that “high-skilled immigration unlocks more opportunities than it takes away. The economy as a whole is going to grow and be stronger, and most of the skilled workforce will find its overall position improved, not diminished, by high-skilled immigration, even if there are some early bumps.”
Another issue that arises in tandem with high-skilled immigration is rising housing costs in urban environments. Grossmann indicated that cities are subject to land constraints, so “when there are more people moving into cities, house prices rise, because you cannot always build as quickly as you would need. Immigrants contribute to that a lot because immigrants usually immigrate into cities, and highly skilled immigrants are those who earn well and can afford housing better, perhaps, than some natives.”
This could create a significant burden for American workers. More than half of urban renter households are currently affected by housing insecurity, a term that encapsulates overcrowding, poor physical home condition, affordability, and recent experience of eviction. Adding to this rent burden would likely push more families out of their homes or drain dollars from the wallets of impoverished families that would otherwise have been going to other necessities.
However, this is not necessarily a reason to avoid giving out skilled worker visas. Grossmann elaborated that these housing problems exist because there is not enough housing already in urban environments and because land ownership and wealth distributions are so unequal in the status quo. He concluded that “this unequal wealth distribution becomes bigger because of immigration, but the problem is the high inequality to begin with, not the immigrants.”
Refining the Process
Although most literature suggests that the H-1B workers have had a significant positive effect on the economy already, there are still steps that can be taken to improve the program.
The most obvious solution is simply to expand the program. Burdened right now by a cap of 85,000 visas, the H-1B program cannot reach its full potential, and many businesses are unable to gain the skilled labor they need. If the program is expanded, all of the benefits that H-1B employees have brought thus far will only grow as more firms get the workers they need.
Another problem comes with the selection process itself. Randomly selecting one-third of the applicants to receive the visa means that an entry level programmer has the same chance of being selected as the unique person who would be able to lead Google’s artificial intelligence department.
To combat this, Kerr believes that a procedure called wage-ranking could help. Wage-ranking means giving visas to the applicants with the highest wages and then working down the list until the visas run out. In this way, Kerr argued that we would be “using a signal that is coming from the labor market, about how much somebody is being paid, in order to prioritize the usage,” thus giving the visas to the workers who are most needed and wanted.
There are also ideas to prevent companies from being able to undercut American salaries with H-1B employees. Kerr believes that a minimum salary for H-1B workers, arbitrarily set to around $100,000, would “make a floor under which we would not let somebody come in who would be just for cost minimization purposes.”
In a similar vein, Peri suggested that making the visas more portable between companies, so that workers are not tied to the firm that supplied their visa, would increase the market power of the workers themselves and decrease the exploitative power of the firms. Similar to the wage floor offered by Kerr, this would hopefully prevent H-1Bs from being used solely to undercut American workers.
Perhaps the most impactful change to the program would come from changes in the way green cards, which allow workers to reside permanently in the United States, are allocated. U.S. law states that no country may receive more than 7 percent of all green cards in a given fiscal year, creating backlogs and bottlenecks for countries like India and China from which many of our visa holders originate. As a result, many of the workers who come to America on H-1B visas are sent home, unable to obtain a green card. After resources have been invested into training an employee who has integrated into the workflow of the office, the loss of those workers actually presents an economic loss for this country.
Furthermore, it is these three factors — that not everybody can get a visa or an extension on their visa, that the visas are tied to a given company, and that green cards are incredibly hard to obtain — that turn the H-1B system from simply an inefficient process into an inhumane one in which immigrants are forced to live in fear. Dependent on their employers and uncertain about their futures in the United States, workers do not purchase cars or houses and do not advocate for themselves at work.
The solution, according to Peri, is simple. “One [visa], if people stay, if they are employed, and if the company continues to sponsor them, should result in one permanent resident application, instead of competing for permanent residency,” he writes. “This will preserve the productivity gain that these people have generated.”
The H-1B program provides a unique opportunity for Americans. Immigrants want to come here, want to join our workforce, and want to help our companies to grow and expand. And the data suggest that they are good at it. By expanding the supply of H-1B visas, changing how they are allocated, establishing rules to prevent their misuse, and making the path to a green card easier, the American economy will be able to benefit even more fully from the presence of the greatest minds the world has to offer.
Image Credit: Unsplash/Agus Dietrich