Restricting Immigration Leads US Employers to Move Jobs Elsewhere

Immigration is a perennial source of debate in the United States. Debates tend to focus on low-skilled immigrants – their legal status, employability, country of origin, and even potential threat to national security. In recent years, however, high-skilled legal immigration has increasingly come under scrutiny. Anti-immigration sentiment can stem from a fear that foreign workers will displace American-born workers and drive down wages. It is aggravated by divisive political rhetoric, which becomes particularly reinforcing during times of economic hardship.

In March 2017, Donald Trump signed Executive Order 13788 – known as ‘Buy American, Hire American’ – which is emblematic of this sentiment. After issuing more stringent regulations for workers in certain skilled professions, rejection rates for the H-1B visa increased at least three-fold[1]. These regulations operate under an assumption that posing additional obstacles to foreign nationals will ultimately benefit the domestic workforce. Dr. Britta Glennon, however, challenges this concept in her paper, “How Do Restrictions on High-Skilled Immigration Affect Offshoring? Evidence from the H-1B Program”.

She argues that in response to external supply shocks caused by visa restriction, employers turn to their foreign affiliate. This is another form of “offshoring” which becomes an economic substitute for importing skilled labor. While offshoring in the global production or manufacturing sector has been extensively discussed in academic literature and media (Ellram et al. 2013; Antras and Helpman 2004; Farrel and Rosenfeld 2005; Florida 2010), Glennon examines this trend in the R&D sector, where it is often overlooked and likely to increase with greater visa restrictions. She focuses exclusively on H-1B visas issued by US multinational firms (MNCs), which constitute the bulk of applicants. The H-1B visa was introduced in the Immigration Act of 1990, as a separate work visa category for foreign nationals with specialized skills.[2] These visas belong to the company, not the person, so applications must be filed by employers. Only 65,000 petitions, with an additional 20,000 visas exclusively for applicants with a master’s degree or higher, can be approved, per the H-1B Visa Reform Act of 2004.

Glennon takes the empirical approach of assigning treatment and control groups based on H-1B dependency. Firms more dependent on the H-1B visa prior to the 2004 quota were assigned to the treatment group, and firms less dependent on H-1B visas prior to 2004 were assigned as the control. She then used regressions to measures the change in these firms foreign affiliate employment before and after the 2004 policy change. Glennon conducted several mathematical variations of this approach, all of which confirmed the same conclusion that after 2004, there was a significant increase in employment in foreign affiliate offices of H-1B dependent firms, as well as a significant increase in their likelihood of opening foreign affiliates in new countries. In the case where H-1B dependency was treated as a binary variable, equal to 1 if the firm had a high H-1B dependency and equal to 0 if it had low dependency, there was a 27% higher increase in foreign affiliate employment amongst the treated firms than the controlled firms.

Glennon’s findings further show that the offshoring of high-skilled labor, especially in R&D, is concentrated in the following three countries: India, China, and Canada. As the most common countries of origin for H-1B visa holders, China and India are viable options for employers to expand foreign affiliate activity. Otherwise, employers can go through more indirect channels like offshoring to Canada, where immigration policies for high-skilled immigrants are significantly more relaxed. It is important to note that it is not just the absolute levels of employment in the Chinese, Indian, and Canadian affiliate offices of US multinational firms that have increased – the total share of employment and patenting in these countries has increased as well. In other words, offshore employment has grown by a significant proportion compared to domestic employment – it is not that the absolute levels of both that have increased to offset each other. Therefore, evidence points more strongly toward the substitutability of skilled immigration for offshoring.  Furthermore, Glennon confirmed that by 2013, a one percentage point more H-1B dependent firm was 0.2% more likely to open a new foreign affiliate office in a new country than the average firm. For R&D-intensive firms, this figure was at 0.3%. Treated firms were 6% more likely to open up affiliate offices in a smaller subset of 25 countries, that include India, China, and Canada.

This has broad implications for the American workforce. First, this proves inaccurate the common trope utilized in political rhetoric, that curbing immigration will benefit the domestic American workforce, especially with regards to high-skilled immigration. Although conventional debates on immigration are focused on low-skilled or illegal immigration, socio-political factors such as the rising cost of higher education and the inevitable economic recession can also aggravate public anxieties against high-skilled immigration.

Second, if hiring is diverted to foreign affiliates, the benefits of employment, income, and innovative capacity will be transferred to those countries, rather than the United States. Glennon published a paper with Dany Baha and Prithwiraj Choudhury at The Brookings Institution that estimates the cost of the immigration restrictions set by the ‘Buy American, Hire American’ executive order to be worth $100 billion for US MNCs. From a strictly nationalistic perspective, this is an unfavorable outcome for the American workforce. On the other hand, countries like Canada, India, and China could reap significant benefits from these investments. China and India have experienced rapid economic growth and development in recent decades, so off-shoring could certainly be a win for their economies and workforce. As such, offshoring is a viable economic substitute for importing skilled labor, and multinational firms that depend on skilled foreign labor are likely to continue capitalizing on this.

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[1] US Customs and Immigration. Non-Immigrant Worker RFE Data.
https://www.uscis.gov/sites/default/files/document/data/non-immigrant-worker-rfe-h-1b-quarterly-data-fy2015-fy2019-q1.pdf

[2] The H-1B application process works as follows: Employers initially submit a Labor Condition Application (LCA) to the US Department of Labor, which ensures that applicants meet the salary eligibility requirements. Once the LCA is approved, then employers can file a visa petition, or an I-129 form, to the United States Citizen and Immigration Services (USCIS). Visas are approved on a first-come-first-served basis, whereby USCIS begins review on the first working day of April and stops once the quota is met. Once the cap is reached, which can happen even within a few days of the review starting since demand far exceeds supply, USCIS randomly selects petitions to be processed. This applies only to private firms; non-profit research institutions and universities are exempt from the H-1B requirements.