The H-1b visa has problems, but it's not hurting U.S. workers

There are improvements to be made, but the backlash is unwarranted.

When Elon Musk fired much of Twitter’s workforce, and demanded that those who remained be “hard-core”, there was a great outcry among people in the software industry. One common allegation was that the engineers who remained were mostly H-1b workers who were unable to leave their jobs because they would then be forced to leave the country. This made a lot of people say very angry things about the H-1b program. I even saw H-1b workers occasionally referred to as “slaves”. Some of the anger stems from a belief among some of Elon’s detractors that if not for the captive state of visa workers, Twitter would have collapsed and left the world’s richest man in the lurch. But many of the complaints echoed long-standing concerns over the unfairness of the H-1b program itself.

Now, as far as I can tell, the allegation that most of Elon’s remaining Twitter employees are on H-1b visas is completely false. Government records show that Twitter had only 300 H-1b workers on staff as of FY2022, and only 673 approved H-1b hires since 2009. Even if Elon had laid off zero of those workers (which is definitely not the case), 300 would still be less than a tenth of the more than 3000 people he still had working at Twitter after the initial layoffs, and around 1/7 of the 2000 to 2500 who are believed to be still working there. And Elon has probably laid off some of the 300 H-1b holders, so the actual percentage is lower still. The vast majority of the people who are working to sustain Elon’s Twitter are not held captive by their immigration status. So on that count, the people raging at the H-1b program should direct their frustration toward a different target.

The more general concerns over the H-1b program, however, deserve serious consideration. Though some critics are doubtless motivated by nativism, the idea that H-1b tethers employees to their employers is a legitimate concern. If some employees can’t change jobs, they won’t have much leverage to negotiate for raises. H-1b visas are not hard to transfer, but if a worker is in the process of applying for a green card, that transfer (which is really a cancellation and reapplication) can be a lot more difficult. And if visa workers desperately fear losing their jobs — an H-1b worker who gets laid off has to leave the country if they can’t find work in 60 days — they’ll accept lower wages. These two effects will tend to put downward wage pressure on other workers, who have to compete with the H-1b holders.

But just because a fear is logical doesn’t mean it’s well-founded. There are plenty of reasons why the “tethering” effect of H-1b visas might not be a big deal for American workers. First of all, there just aren’t that many H-1b workers in the country — somewhere shy of half a million, compared with between 5 and 12 million total tech workers. That’s just not a lot of competition.

Second, H-1b workers are very hard for companies to get. In addition to the time required for the paperwork, companies have only a low chance of actually being allowed to make the hire. There are so many H-1b applications, and so few available spots (the total is officially capped at 85,000 per year), that employers have to enter a lottery in which they have less than a 20% chance of being allocated a visa. In other words, any boss who tells his native-born employee “If you demand higher wages, I’ll replace you with an H-1b worker” is almost certainly bluffing; the chance that he’d be able to follow through on that threat is low.

On top of that, many of the companies that hire H-1b workers are outsourcing companies. This is actually a major flaw in the program — these outsourcing workers are not the kind of high-skilled workers we need to be prioritizing, and they’re crowding out people with more economic potential. But it also means that many H-1bs simply aren’t competing for the kind of good high-wage tech jobs that people worry about in this context.

So there are plenty of logical reasons to think that H-1b workers aren’t doing much, if anything, to hold down the wages of their American compatriots via brutal competition. As it happens, there’s also some direct evidence against the common fear. Mithras and Lucas (2010) studied compensation of H-1b workers compared to their native-born colleagues, and found that after controlling for observable determinants of skill, the visa holders actually earned more:

This study uses data on skills and compensation of more than 50,000 IT professionals in the United States over the period 2000–2005 to study patterns in compensation of foreign and American IT professionals…Contrary to the popular belief that foreign workers are a cheap source of labor for U.S. firms, we find that after controlling for their human capital attributes, foreign IT professionals (those without U.S. citizenship and those with H-1B or other work visas) earn a salary premium when compared with IT professionals with U.S. citizenship..Setting lower and fully utilized annual [H-1B] caps results in higher salary premiums for non-U.S. citizens and those with work visas.

This is exactly the opposite of what you’d expect if H-1b workers were forced to accept low wages because they’re yoked to their employers. It flies directly in the face of studies claiming that H-1b workers are paid less; those studies don’t control for ability, so what they’re really just measuring is the fact that the companies that tend to hire lots of H-1bs tend to be lower-paying companies in general (such as outsourcing firms). This one paper isn’t a slam dunk case, of course — the economists could have failed to control correctly for skill levels. But this study should prompt people who just assume that H-1bs are paid less to reexamine their beliefs.

Anyway, this is just analyzing one single aspect of H-1bs — their direct wage competition with their coworkers. In fact, H-1b workers do lots more than just compete with people. They boost the economy in at least two important ways.

First, having more skilled workers in an area enhances clustering effects. The reason cities like San Francisco and Austin and Seattle are tech hubs is because tech companies invest there. And one of the biggest reason they invest there is that there’s a pool of skilled workers to hire. H-1b workers increase the size of that pool, and so they make a whole city a more attractive destination for investment. That will tend to raise both employment and wages — including for native-born workers in the same industry!

In fact, there are multiple studies showing that either this effect, or some other benefit of H-1b workers, dominates any competitive pressure when it comes to the effects on the native-born.. For example, Peri, Shih and Sparber (2015) find that “increases in STEM [H-1b] workers are associated with significant wage gains for college-educated natives.” Kerr, Kerr, and Lincoln (2015) find “consistent evidence linking the hiring of young skilled immigrants to greater employment of skilled workers by the firm”.

These results should remind you of the most important thing to keep in mind when you read about immigration and its effect on the labor market: Immigration isn’t just an increase in labor supply, it’s also an increase in labor demand.

The second way H-1b workers help the U.S. economy — and, thus, the fortunes of the native-born — is through innovation. Yes, many H-1bs work at low-value outsourcing companies, and this is a problem. But many do important innovative work. Lincoln and Kerr (2008) find that increases in H-1b levels increase patenting (without decreasing patenting by the native-born). Khanna and Lee (2018) find that when a company is lucky enough to get more H-1bs, it introduces more new products and its revenue goes up. Dimmock, Huang and Weisbenner (2019) find that startups that win the H-1b lottery get more VC funding and have more successful IPOs. Though it’s hard to measure, these innovative activities probably generate economic activity far from the city or company where the H-1bs work, and so they boost wages and employment for native workers in addition to the ones found in the earlier studies.

OK, so to sum up, the common fear that American workers will see lower wages from competing with essentially indentured foreign colleagues seems logical, but it doesn’t have support in the data. In fact, the effect seems to be the opposite — more H-1bs means higher wages and more employment for skilled American-born workers. Furthermore, when we’ve cut H-1b numbers in the past, it didn’t lead to more Americans getting jobs in the tech sector — it just led to more outsourcing.

The idea that the main effect of immigrants is to compete with native-born American workers is incredibly seductive, simple, and persistent. It is also, generally speaking, wrong.

That said, there are some important reforms we should make to the H-1b program. The first order of business, given how many H-1bs are gobbled up by low-value outsourcing firms, is to reallocate H-1bs toward more productive workers at more productive companies. In fact, there are already some efforts along these lines. Trump implemented a rule raising the minimum wage for H-1b visas; though it was struck down by the courts, Congressional legislation should reinstate something like it. A bipartisan bill now making its way through the Senate would limit H-1b allocations for companies that hire a very large percentage of their workforce using H-1bs (read: outsourcing firms), and prioritize visa applicants with special skills or who were educated in the U.S.

Those steps will make sure that H-1bs get allocated toward the proverbial “best and brightest”. Of course, it would also be good to raise the H-1b cap by a substantial amount, as we did in the Clinton and Bush administrations.

On top of that, we should change the H-1b program so as to make job-switching easier for visa holders — which will also hopefully help quiet the fears of “tethering”. One obvious change would be to increase the grace period between when an H-1b worker is laid off and when they have to find a new job or leave the country. This grace period is currently 60 days, but it should be tripled to 180, since job searches often take that long. Another priority should be to make it easier to transfer an in-process green card application along with an H-1b. H-1b transfers themselves were streamlined long ago, but the green card application transfer needs to be a lot easier, quicker, and less risky as well.

These tweaks would probably not have a big effect on American tech workers’ wages. But they would make life a lot easier for the talented foreigners who want to come work and live in America. And they would help quiet fears about the H-1b itself. The fears are mostly unfounded, but even unfounded fears still matter, both electorally and in terms of convincing people that their government is on their side.

But if you are the type of person to look at things through the cold, dispassionate lens of data, then you should realize that the H-1b program isn’t nearly as bad as you’ve heard. It has its problems, but overall it’s a good program.

Update: Someone asked me why, in the Mithras and Lucas (2010) paper, H-1b workers actually get paid more than native-born workers of equivalent skill. It’s a good question. One possibility is that the H-1b workers have some extra skill that the economists were unable to observe. Alternatively, H-1b workers might just tend to have different skill-sets than native-born folks, so that they’re not directly comparable (indeed, this was the government’s official rationale for establishing the program in the first place — to hire workers with skills that are in short supply domestically). A third possibility is that precisely because they know they’ll be a bit more “locked up” than other workers, H-1b workers demand a higher wage as compensation for that — a little more money up front, in exchange for not being able to hop jobs as easily after they arrive. In economics, we’d say that they’re getting paid for a loss of option value. Now the next question is: Does this loss of option value act as a form of wage competition with the native-born, such that Americans are forced to accept lower wages than H-1b workers just to be competitive? Maybe so (and that’s something researchers could figure out, though it would be tougher). But as I mentioned, that competitive effect would be greatly reduced by the difficulty of actually hiring H-1bs in any significant number. And studies showing wage gains for the native-born suggest that the competitive effect, whatever it is, is outweighed by clustering-driven investment or some other synergistic effect. Hope that all makes sense!

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