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Analysis of the Economic Effects of Immigration Reform

July 15, 2013

by Dr. Kevin Hassett

SUMMARY

This paper explores the economic consequences of expanded immigration on the U.S. economy. It begins by reviewing the immigration practices of our OECD trading partners, and documenting that immigration, as a share of the work force, is well below international norms. The literature identifying the economic impact of immigration is reviewed, suggesting that economic growth could expand significantly if immigration in the U.S. were expanded. Three policy options are then investigated. The first is a hypothetical expansion of immigration to align it with international norms. This policy is estimated to increase GDP over the next decade by approximately $2 trillion. Two alternative policies are then explored. The first simulates the effect of the recently passed Senate bill. The bill is found to have a fairly small effect, only lifting GDP over the 10 year window by approximately $200 billion. This number is low because of provisions in the bill that would likely significantly limit access to the expanded number of visas the bill contemplates. In the third scenario, the impact of the immigration expansion without these provisions is explored, and is estimated to increase GDP over the 10-year window by approximately half a trillion dollars.

ANALYSIS OF THE ECONOMIC EFFECTS OF IMMIGRATION REFORM

I) INTRODUCTION: IMMIGRATION SYSTEM IS IN NEED OF REFORM

It is axiomatic in economics that the simplest path to expanding output is expanding inputs. A key corollary of that observa- tion is that a primary factor driving American economic growth in the past two centuries has been the growth of the stocks of capital and labor, and that a key contributor to the growth of the labor force has been immigration. In recent decades, the country’s economic success has been driven by innovative currents and the expansion of entire new industries with high growth potentials. This evolution surely, in part, reflects the acceleration of technological change, but it also is the result of a more uncomfortable truth, that the steady and predictable growth of the normal inputs of production, capital and labor, has slowed. That brings the United States to a strange new world where healthy growth is no sure thing, depending more and more on the presence or absence of technological good fortune. A key objective of policy should be to return the United States to a path that can post steady growth of inputs and outputs, and take advantage of technological opportunities as they arise. American immigration policy fails on both counts, deviating sharply from international norms in terms of the overall flow of workers allowed into the workforce, and undermining innovation by limiting access to U.S. labor markets of the highly trained individuals best capable of innovating and developing new technologies.

The long run historical perspective is striking. Figure 1 shows the number of individuals achieving permanent residence as a share of U.S. population since 1900. In recent years the share has inched up, but remains much lower than it was in earlier years, hovering between 0.3 and 0.4 percent.

Figure 1: Number of Individuals Achieving Permanent Residence as a Share of U.S. Population, 1900-2010

figure 1

Source: Department of Homeland Security and U.S. Census Bureau

Permanent residents can qualify for that status for a number of reasons. Figure 2 reveals the share of permanent residents who qualify based on employment. In a more rapidly changing economy, one would expect skill mismatches to be more common, and thus, optimal immigration policy would increasingly allow employers to rely on immigrant workers when bottle- necks arise. The chart demonstrates that the U.S. immigration system has not been significantly updated in years, with the share essentially holding steady for decades.

Figure 1: Share of permanent residents qualifying based on employment, 1968-2011

figure 2

Source: Department of Homeland Security

Calculations of the U.S. economy’s potential GDP also suggest that the economy has been and will continue underperform- ing due to less steady labor supply. At its peak in the 1970s, the contribution to the growth of potential GDP from potential hours worked was 1.7 percentage points. Since then it has fallen to 0.3 percentage points on average in 2002-2012, and it is projected to stay at that level for the next 10 years as well. With a higher labor contribution, potential GDP—the theoretical output the economy is capable of with all the factors of production fully employed—could be as much as 1.4 percentage points greater.

To address these challenges, the Senate recently passed a bill to reform America’s immigration system, which has sparked a debate surrounding immigration policies. This report briefly reviews the economic literature on immigration reform, discusses the flaws of current policies, analyzes the provisions in the Senate bill, and summarizes the immigration policies of our trading partners. It concludes with economic estimates of several reform scenarios and a policy discussion about its findings.

II) FOCUS OF PUBLIC DEBATE ON LOW-SKILLED, ILLEGAL IMMIGRATION INSTEAD OF HIGH-SKILLED IMMIGRATION

The need for immigration reform in the United States is commonly acknowledged, but discussion of the economics of legal immigration seems rarely to garner public attention even while debate focuses on low-skilled, illegal immigration. To be sure, the problem of illegal immigration is an appropriate focus of debate, but not to the exclusion of debate over legal immigration policies, which analysis below will demonstrate can have important and substantial economic effects.

On May 9, 2013, the Senate Judiciary Committee adopted six Republican amendments to the Senate bill, all of which are designed to strengthen the border and prevent illegal immigration. Yet, the Senate bill encompasses all aspects of the immigration system—diversity visas, investor visas, high-skilled visas, a new point-based merit visa—and not merely a path to citizenship for unauthorized immigrants.

As can be seen from the chart below, the number of unauthorized immigrants has been decreasing over the past couple of years following its peak. Some experts suggest that net migration might have fallen to or below zero. If so, then policymakers may well find themselves in a position where the emotional issue of diminishing importance drives policy in a space where dispassionate economic reasoning applied to legal immigration could produce policies with significant and lasting economic benefits.

Table 1: Unauthorized immigrant population in the United States

figure 3

Source: Pew Research Hispanic Center

Accordingly, the question of the likely impact of expanded legal and possibly high-skilled immigration is the focus of this report.

III) THE ECONOMIC BENEFITS OF HIGH SKILLED IMMIGRATION

The most basic economic concepts suggest that immigration will have a positive effect on the economy. Theory explains that the output of an economy can surge if the key factors of production—capital or labor—surge, or if firms learn to combine inputs in a more productive way. Immigration can contribute to economic growth through either channel: either through lower- ing production costs by significantly increasing the labor supply or by increasing productivity through innovation.

Economists have conducted extensive research confirming this basic intuition and their research finds that, on the whole, immigrants benefit the economy. The facts and research findings can be divided into three categories: 1) research into the in- novation and entrepreneurship of immigrants, 2) research investigating immigration effects on domestic labor markets, and 3) research focusing on aggregate effects on gross domestic product and the federal budget. Each category is addressed in turn below.

Innovation and Entrepreneurship

Innovation and intangibles such as human capital are key to the success of a modern economy. In fact, a 2009 paper by Carol Corrado, Charles Hulten and Daniel Sichel found that only 8 percent of output growth per hour can be attributed to brick and mortar forms of capital investment.  The rest is a result of a mix of intangible factors. Many factors document that immigrants create value by increasing productivity though innovation and development of intangible assets, especially through research and development in the technology sector. As common sense would suggest, the entrepreneurial spirit that drew immigrants out of their homeland to seek fortune in a foreign country also aids their business pursuits.

The high caliber of U.S. universities draws many top students from abroad, who frequently earn the highest possible degrees there. As a result, foreign students form a substantial percentage of all the doctorate degrees earned in most fields, with a particular focus on science, math, engineering and technology (STEM) fields. In 2010, more than half of PhD recipients in STEM fields were non-American according to the NSF Survey of Earned Doctorates. Specifically, out of 7,552 doctorates awarded in engineering, 3,851 were awarded to temporary residents of the United States.  Due to their propensity to acquire terminal degrees in STEM fields, foreign-born citizens and visitors represent fully 24 percent of the nation’s scientists and 47 percent of U.S. engineers with doctorate degrees.

High quality education creates a stepping stone to future successes, and immigrants have also made lasting and exceptional contributions to their fields. For example, one-quarter of all U.S.-based Nobel laureates of the past fifty years have been foreign born.  Immigrants are also over-represented among members of the National Academy of Sciences and the National Academy of Engineering, among authors of highly-cited science and engineering journal articles, and among founders of bio-tech companies undergoing initial public offerings. Dedication to research and development (R&D) is the lifeblood of successful innovation, and it is undeniable that some of the individuals best positioned to contribute to R&D in the country are foreign-born.

Immigrants are also disproportionately successful at turning their chosen research fields and graduate degrees into business assets. For example, even though foreign-born individuals account for only 13 percent of the population, they account for about one-third of U.S. patented innovations.  Others have found that immigrants are twice as likely to patent as natives and research has estimated that for every 1 percent increase in immigrant university graduates, patents per capita increase a whopping 6 percent. Successful patents are central to the market performance of technology firms that create a booming 21st century economy. However, despite all its successes, the U.S. ranks only ninth in the number of patents per capita and just 13th in scientific research articles per capita according to a recent study by the Brookings Institution. As a result, there is ample room for the U.S. to expand its share of innovation.

As mentioned above, immigrants do not bring only their intellectual abilities, but also an entrepreneurial spirit. The decision to pursue either an educational degree or a professional position in a different country requires unique personal characteristics, which may include desire for new undertakings, higher tolerance of risk, ability to deal with the unknown, and perhaps a sense of adventure. All of these can combine to produce successful entrepreneurs and business leaders.

Statistics once again support the intuition. For 25.3 percent of new high-tech companies started in the United States from 1995 to 2005, with more than $1 million in sales in 2006, at least one of the key founders was foreign-born, generating income and employment for the whole country. Furthermore, more than 40 percent of the 2010 Fortune 500 companies were founded by immigrants or their children. A different report found that 48 percent of the country’s top venture-funded companies had at least one immigrant founder. Those companies on average created about 150 jobs per company.

Moreover, immigrant entrepreneurs start 17 percent of all new businesses in the United States and represent 13 percent of all business owners. The business formation rate per month is .62 percent (620 out of 100,000) for immigrants and .28 percent among non-immigrants (280 out of 100,000). The evidence is overwhelming. Immigrants contribute to the US economy not only through innovative ideas and scientific research, but also by starting new businesses and industries and creating new employment opportunities for natives.

Employment and Wages

One of the benefits of immigrants is their potential to create jobs and increase wages of native workers. This is particularly important in the face of the state of the current U.S. labor market. Even though the unemployment rate has been declining over the past few months, it is still high, and a record high number of workers have been unemployed for 6 months or more. Over 4 million people are disconnected from the labor force. The country is in need of creative strategies for these individuals to rejoin the labor force. Immigration has the potential to help in this area.

Recent work by Madeline Zavodny documents the job-creating potential of high-skilled immigrants. She concludes that immigrants with advanced degrees boost employment for US natives. In general, an additional 100 immigrants with advanced degrees in STEM fields from either US or foreign universities is associated with an additional eighty-six jobs among US natives. An additional 100 immigrants with advanced degrees—regardless of field or where they obtained their degrees—is associated with an additional 44 jobs among US natives. Speaking of H-1B visa holders specifically, adding 100 H-1B workers results in an additional 183 jobs among US natives, according to her research.

This result is easy to believe if immigrant and native workers are thought of as complements rather than competitors. The research focusing on the innovative and entrepreneurial characteristics of immigrants described above demonstrates that immigrants bring many desirable skills and new ideas to the table. The added diversity increases productivity by encouraging specialization and increasing investment. If more foreign born workers are added to the labor force, firms may utilize them for positions and tasks in which they have a comparative advantage, allowing the native workers to specialize in the positions and responsibilities in which they have a comparative advantage instead. Thanks to the innovation and diversity that the immigrants bring to the economy, new jobs and sectors are created.

Viewing immigrants as complements allays one of the greatest fears of the opponents of immigration reform, which is that foreign-born workers hurt the employment prospects of Americans and lower their wages. Economic research has been particularly active in this sphere. While disagreements exist, the literature—on average—finds benefits for domestic workers with the greatest benefits stemming from high skilled immigration in particular. Earlier contributions to the literature focused on case studies analyzing the effects on local labor markets and mostly failed to find large effects on employment and wages of natives. Later research demonstrated the inefficiency of this approach and shifted the focus to a national-level analysis. Recently, a 2012 paper by Ottaviano and Peri found that immigration between 1990 and 2006 had a small positive effect on average native wages, to the tune of 0.6 percent. Previous work by Peri also finds no significant negative effects on the employment opportunities and wages of U.S. born workers. According to his work, the economy absorbs immigrants by expanding job opportunities rather than by displacing native workers. Other researchers also find positive effects on the wages of natives from high skilled immigration specifically. A paper by Moretti finds that an increase in the share of college-educated immigrants by 1 percent increases productivity and wages for workers in a typical city by 1 percent. In an earlier paper focusing on German labor markets, Pischke and Velling find no detrimental effects of increased immigration on the employment outcomes of natives, confirming that this phenomenon is not limited to the United States.

Despite this evidence, many critics fear that increased immigration will hurt the least-well-off workers in the country. Specifically, there are some concerns that immigrants will create adverse effects on individuals close to the poverty line. Peri’s research alleviates even these concerns; he concludes that there is no negative impact of immigration on the poverty levels of natives. His most recent research goes even further and suggests that manufacturing firms that employed higher shares of immigrant workers fared better than their counterparts during the period from 2000 to 2007.

However, benefits of immigration are not limited to high-skilled workers. Even at a time with high unemployment there are positions which require very little skill and education that immigrants can sometimes disproportionately fill. Immigrants create additional benefits for the native population by lowering the prices of certain goods and services.

Overall, economic evidence confirms that immigration does not have a negative effect on employment, wages and welfare, and can often have a positive effect.

Gross Domestic Product and the Federal Budget

The specific effects of immigration described above can be aggregated into effects on the country’s gross domestic product and federal budget. Economic intuition dictates that an increase in labor supply or an increase in productivity due to innovation would lead to an increase in GDP. The research conducted to date supports that reasoning. As for the effects on the budget, the debate centers on the question of whether immigrants contribute more in additional revenue than they utilize in spending on federal programs or vice versa. The specifics naturally depend on the particular immigration reform; however, when focusing on high-skilled immigration, it is clear that immigrants have a positive effect both on aggregate output and the federal budget.

Research by Madeline Zavodny speaks to the effects of immigration on the national budget. She addresses the concern of increased cost on the federal government with her finding that in 2009 the average foreign-born adult with an advanced degree paid over $22,500 in federal, state, and Federal Insurance Contributions Act (FICA, or Social Security and Medicare) taxes, while their families received benefits one-tenth that size through government transfer programs.

Focusing on the effects of reform addressing illegal immigration, a study by the Center for American Progress finds that depending on the scenario, immigration reform would increase GDP by 832 billion to 1.4 trillion cumulatively over 10 years and increase jobs by 121,000 to 203,000 annually. Taking a historical perspective, a report by the Cato institute concludes based on the historical experience of the 1986 Immigration Reform and Control Act—which granted legal status to illegal immigrants who entered the United States before 1982— that a comprehensive reform would yield at least $1.5 trillion in added U.S. GDP over 10 years. These estimates are not controversial, as they depend on simple accounting relationships between inputs and outputs.

Support for the growth effects of immigration reform is not limited to the pages of academic research. When analyzing the economic effects of the Comprehensive Immigration Reform Act of 2007 (S.2611), the Congressional Budget Office (CBO) concluded that the bill would result in 3.4 million additional workers in the United States and estimate the effects on GDP under two separate hypotheses. Under the high investment assumption, GDP would increase by 0.4 percent on average in the first 5 years after the bill’s enactment and 1.3 percent on average in the following 5 years. Under the low investment assumption, GDP would increase by 0.3 percent on average in the first 5 years and 0.9 percent on average in the next 5 years. In its cost estimates from 2007, the CBO also estimated that the effects of the Comprehensive Reform Act of 2007 would have a relatively small net effect on the federal budget balance over the next two decades since additional expenditures would be mostly offset by additional revenue.

The CBO recently released a study directly addressing the effects of the Senate bill. They estimate that the bill would result in a net increase of 10.4 million of the number of people residing in the United States by 2023. It would also decrease federal budget deficits by $197 billion over 2014-2023 along with an increase in net discretionary costs of $22 billion, resulting in net savings of $175 billion between 2014 and 2023 from the Senate bill. Unusually, the CBO’s estimates looked at two decades. Employment would increase by 16.2 million by 2033 with deficits declining by $700 billion from 2024 to 2033. Lastly, the CBO projected that, following reform, GDP would increase by 3.3 percent in 2023 and by 5.4 percent relative to current law.

Moreover, a recent report by Social Security’s Chief Actuary estimating the effects of the Senate immigration bill concluded that in ten years the bill would increase US employment by 1.75 percent and GDP would increase by 1.63 percent.

A report by the Technology Policy Institute from March 2009 attempted to estimate the benefits of the counterfactual scenario, where changes had been made to the immigration system. They found that had the constraints on H-1B visas and employment-based green cards been removed in the 2003-2007 period, roughly 182,000 foreign graduates of U.S. colleges and universities would likely have remained in the country and raised GDP by roughly $13.6 billion. Relaxation of H-1B caps under the Comprehensive Immigration Reform Act of 2007 could have increased labor earnings and GDP by $60 billion in the tenth year following enactment and improved the federal budget’s bottom line by $64 to $86 billion over ten years.

Some researchers contest these findings, maintaining that immigration harms the native population. One recent study estimated that the presence of immigrant workers makes the U.S. economy 11 percent larger each year; however, 97.8 percent of the surplus goes to the immigrants themselves with the small remainder going to natives. These estimates do not include the effects of immigration on the federal budget, and therefore cannot be viewed as a complete assessment of immigration’s benefits. In other words, the conceivably negative effects of immigration are actually a small positive. Since other positive effects are excluded, the net benefit to domestic citizens will be larger.

Overall, the consensus of the literature is that immigration has a positive effect on Americans and raises U.S. living standards for natives through higher wages, lower costs for certain goods and services, increasing productivity, and technological innovation.

IV) THE HIGH-SKILLED IMMIGRATION POLICIES OF THE UNITED STATES

The current immigration system in the United States has not been significantly overhauled in years and does not systematically expand immigration of the high-skilled and educated workers that could contribute significant positive external benefits to our economy.

The main vehicle for high-skilled immigration is the H-1B visa, which was originally created by the Immigration and Nationality Act. The H-1B visa is a temporary immigration category that allows US employers to seek short-term help from skilled foreigners in “specialty occupations.” The visa is limited in duration to three years with the option of renewal once for another three years. After six years—if the worker has not qualified for permanent residence—she must depart the United States for at least a year. In order to be granted a visa in the first place, the worker must find an employer willing to sponsor her visa. The visa is always linked to the employer; therefore, the employer—not the worker—submits the application for the visa. The worker’s visa is only valid for employment with the original employer. If the worker wants to switch to another employer, the new employer must submit a petition to the government requesting a transfer of the worker’s visa to this new employer.

Furthermore, since the Immigration and Nationality Act of 1990, there has been an annual cap on the number of H-1B visas that can be issued. The cap has been changed in the past rising to as high as 195,000 from 1999 to 2002, but today H-1B visas are limited to 65,000 a year with an additional 20,000 reserved for workers with advanced degrees from U.S. institutions, which have been available since 2005. Workers employed by non-profit organizations, universities, or other research organizations are exempt from this cap, so the number of H-1B visas issued every year is higher than the described ceiling. Nevertheless, the cap is not sufficient to cover the demand for foreign workers as is demonstrated by the fact that the ceiling is frequently reached within a couple of days of the application window opening. This insufficient supply of worker visas is one of the greatest shortfalls of the current system, affecting the operations of many firms. Companies that require high numbers of workers with PhDs in STEM fields are particularly affected, since a large proportion of these workers are foreigners, as mentioned above.

The application for an H-1B visa is not only complex, but also expensive. The employer must cover a $325 base filling fee, a $1,500 labor certification fee (only $750 for employers with 25 or fewer workers), a $500 fraud detection fee, an optional $1,225 premium processing fee (if the employer wants the application resolved within 15 days), plus any legal fees the employer incurs while processing the application. H-1B dependent employers—with 50 or more workers 50 percent of whom are H-1B or L-1 workers—must pay an additional $2,000 with the application. The high cost should serve as sufficient proof for critics who believe that US employers are abusing the system and hurting American workers by hiring foreigners at lower pay. Hiring a foreign worker is significantly more expensive and uncertain for firms; therefore doing so without a valid reason would not make business sense.

There are other visas that allow immigrant workers into the United States. For example, the H-2A visa is available for temporary agricultural workers, the E-3 visa is available for Australian professionals, the L-1 visa allows companies with operations both in the United States and abroad to transfer certain employees among its various branches, and the H-2B visa is for temporary non-agricultural workers.

The H-1B visa is one of the few visas with dual intent, meaning it is possible to apply for an immigrant visa and permanent residence green card in the future. In order to apply for an employment-based green card, the workers must fit into one of five categories: E1 is for priority workers, E2 for Persons with Exceptional Ability, E3 for Skilled Workers, E4 for Certain Special Immigrants, or E5 for Immigrant Investors. The third preference is the one that most use. In order to apply for this preference, an employer must once again sponsor the employee’s application and certify that the worker has a permanent position in the organization. Finally, these employment visas are also subject to an annual limit. In 2012, the legal limit was set at 144,951.41 In contrast, the limit for family based immigration—not for immediate relatives such as children or spouses of citizens, but for parents, siblings of citizens as well as relatives of permanent residents—was set at 226,000. In reality, out of 1,031,631 individuals attaining permanent residence only 14 percent or 143,998 qualified based on employment.

The above mentioned rules are outdated and hinder US competitiveness. The immigration system is not calibrated to deliver productive workers to the country’s labor market.

V) REVIEW OF IMMIGRATION STANDARDS IN OTHER COUNTRIES

The economic benefits of immigration have been recognized by our trading partners, who have allowed their immigration laws to evolve as the economy has changed. Other members of the Organization for Economic Co-operation and Development (OECD) have identified the shortfalls mentioned in the previous section—the ease of acquiring work visas and the emphasis on high-skilled immigration. As a result, the United States is lagging behind as other countries engage in a competition for top talent that will enable the most successful nation to prosper economically.

Numbers from the 2012 OECD International Migration Outlook demonstrate the focus that other nations have given to employment related immigrants. As a share of all immigrant inflows, workers form a larger proportion in most other OECD countries. For example, in the United Kingdom workers account for 33.1 percent of total migration in- flows, 27.3 percent in Canada, and 22.3 in Australia. On the other hand, in the United States, workers accounted for only 6.4 percent of total migration inflows.

Another useful metric that demonstrates the gap the United States faces is the immigrant to population ratio shown below in figure. The average for the OECD countries is 0.7 percent whereas the United States is at 0.4 percent (including estimates of illegal immigration).

Figure 3: Ratio of incoming immigrants to population in 2010

figure 4

Source: OECD and Pew Research Hispanic Center

The fact is other countries admit more immigrants compared to their size than the United States does. This is not a recent development. The United States has been below the OECD average for immigrant inflow for at least a decade, as figure 4 demonstrates.

Figure 4: Immigration inflow as a share of population from 2001 to 2010

figure 5

Source: OECD

In order to identify the best practices in immigration, the immigration policies of a select number of our trading partners are summarized below.

Table 3: Summary of immigration related facts and statistics for select OECD members

figure 6

Source: OECD

Australia

Australia recently increased the number of employment-related permanent resident visas to 129,250 for the year 2012-2013, which accounts for 68 percent of its total Migration Program. On the other hand, the United States with a population almost 14 times larger only offers about 140,000 employment related green cards annually and the proportion of family vs. employment basis is reversed. Qualifying for a permanent residence visa for employment purposes is based on a points system in Australia, and there are several categories that apply. Australia has specifically enacted a number of reforms to attract highly skilled workers. It introduced an online system called SkillSelect, where a worker submits an Expression of Interest application and then receives an invitation to apply for a specific visa, which provides more ease and flexibility for the application process.

The country also has options for temporary work with its Subclass 457 visa functioning the most like the American H-1B visa, where an employer sponsors a worker’s visa application and the worker is then eligible to work for up to 4 years. Australia also provides so-called work holiday visas that allow young people to travel and work in Australia for up to 12 months. Overall, the focus of Australian immigration system is decisively on permanent, high-skilled migration.

Canada

Canada’s immigration system also features a points-based immigration program for high-skilled workers. Immigrant workers can apply for permanent residence under the Federal Skilled Worker Program. Eligibility is based on a number of factors including age, education, experience, employment offer, etc. If a potential immigrant achieves 67 out of 100 points, she can obtain permanent residence. There is a cap on the number of applications considered under this program, which is equal to 5,000, but it does not apply to immigrants with offers of employment.

Canada also has a Federal Skilled Trade Program and a Canadian Experience Class as other options for workers to utilize. Moreover, it grants much more generous work permits to students who have graduated from Canadian universities as well as permits for temporary workers. Overall, its immigration framework is targeted toward bringing and retaining highly skilled and talented workers.

In 2012, Canada admitted 160,617 economic immigrants, including skilled workers, entrepreneurs, etc., according to its preliminary figures as well as 213,516 temporary workers. The number of immigrants who received permanent residence based on employment was higher in absolute terms than the number of employment-based green cards that the US provided in 2012 even though the United States has a population almost 10 times the size of Canada.

Germany

A country that has not been known for its generous treatment of immigrants in the past, Germany has also embraced skilled immigration as a source of innovation and productivity. In 2005, it enacted a series of reforms to encourage high-skilled immigration and is in the midst of enacting more reforms. In 2012, 1,081,000 people immigrated into Germany, the highest number since 1995. Undoubtedly, Europe’s most dynamic and prominent economy, Germany has realized the benefits of immigration in fueling its economic growth engine.

Germany has several options available for skilled workers. If deemed a highly-qualified professional, the person can receive the equivalent of a permanent residence permit without any job offers or specific visa. Other skilled professionals may receive a limited residence permit if they receive an employment offer. Researchers working on specific projects may also receive a visa or a residence permit for the duration of their research. The EU blue card is available for individuals with a higher education degree earning above a certain minimum level. After 33 months of employment and proof of pension payments, blue card holders can receive a permanent residence card. Finally, entrepreneurs operating in an area of Germany’s economic interest may receive temporary residence initially and permanent residence after three successful years of business operations.

Even though citizens of the European Union are allowed to work in Germany without any special authorization, Germany’s rules toward migration from non-EU countries are becoming very lenient. As a result of an increase in immigration, its population increased in 2011 for the first time since 2002.

New Zealand

New Zealand’s system is in many aspects similar to Australia’s. The country also has a Skilled Migration Program, where applicants submit Expressions of Interest through their online website with points earned based on their skills, education, English proficiency, age, employment, etc. If an application has more than 100 points, it is eligible for selection. With over 140 points, the applicant is automatically considered. Expressions of Interest are selected every two weeks creating a very dynamic immigration system.

The country also has investor and entrepreneur visas available as well as work holiday visas similar to Australia’s. Under the work holiday visa, young individuals can find temporary work for a period of 12 months. The application is specific to individual countries with some countries being subject to annual quotas—for example, Argentina has 1,000 slots available annually, Mexico 200, Thailand 100, etc. Young skilled foreigners also have 300 Silver Fern Job Search visas available, which provide nine months for job search. Once a job offer is secured, the young professional can receive a Silver Fern Practical Experience visa. Furthermore, New Zealand also has several categories of more typical temporary work visas available for individuals with specific skills, graduate students, etc. Overall, the country is very open to immigration, particularly high-skilled; in year 2012/2013, it admitted 114,977 foreigners for work purposes, which is a large percentage given New Zealand’s small population.

United Kingdom

Like Germany, the United Kingdom does not have work restrictions for EU citizens; therefore, all of its immigration policies apply only to non-EU citizens. In 2008, the country established a new points-based immigration system, which is how most foreign workers gain access to the country.

In April 2011, the United Kingdom announced a permanent cap on skilled migration to 21,700. Of these, 1,000 are set aside for individuals of exceptional talent. The cap does not apply to workers earning more than £152,100 annually. This change was designed to lower immigration, going against the policy goals of many of the other OECD countries. However, the focus of the immigration system remains high-skilled immigration. Two tiers of visas are available, where Tier 1 is designed for exceptional talent, immigrant entrepreneurs and investors, and general especially highly-skilled immigrants. Tier 2 visas apply to skilled immigrants with a job offer, who receive authorization to work for 3 years with a possible 3 year extension. After the six years it is possible to apply for permanent residence. The UK visa system resembles in many ways the U.S. H-1B visa. Regardless of the recent reforms, the United Kingdom issued 102,900 work-related visas and 94,581 visas for principals already in the country.

It is important to remember that the United States and many of the other OECD countries mentioned above have important differences in their immigration experiences. The United States has traditionally been seen as a nation of immigrants, where individuals from different background fuse together into a new culture—the so-called melting pot. On the other hand, Europe has been historically characterized by nationalistic divisions and has recently established free movement within the European Union. All these historical factors affect policies in place today. Yet from a simple overview of some OECD policies, the United States is clearly behind the international standards on immigration and is likely losing much top immigrant talent to its competitors.

VI) REFORM FRAMEWORK AND CURRENT PROVISIONS

Opponents of an expansion of U.S. immigration often point to the large numbers of the unemployed, who have not been lucky enough to find employment, and others worry that immigrants will displace current workers and exacerbate the unemployment problem. This concern was addressed in the previous literature review. In addition, a report compiled by the McKinsey Global Institute projects that as early as 2020, the global economy could experience a shortage of workers with tertiary education to the tune of 38-40 million, or 13 percent of the demand for such workers. There are other reasons for concern. According to a report by the Kauffman Foundation, immigrant-founded companies have slipped from 25.3 percent to 24.3 percent in recent years.

In order to preserve its economic growth, the U.S. should strive to reform its immigration system. Acknowledging the need for new immigration policy, the Senate passed a comprehensive immigration reform bill on June 27, 2013. The 1,198-page bill attempts to improve all aspects of the immigration system, dealing with illegal immigration, increasing high-skilled immigration, and eliminating outdated and ineffective elements.

H-1B reforms

Among its numerous provisions, the Border Security, Economic Opportunity and Immigration Modernization Act of 201358 seeks to reform the H-1B program in response to the visa’s shortcomings. The main provision is to increase the annual cap from 65,000 to 110,000 visas for high-skilled workers (and up to a possible 180,000 over time based on a high-skill job index) along with an additional 25,000 visas for advanced degrees (instead of the current 20,000). The bill would allow at minimum an additional 50,000 highly skilled workers into the country annually. Other small changes, such as creating a 60-day grace period after the expiration of the H-1B visa or providing their spouses with work authorization will not have a dramatic economic effect, but could make the experience less unpleasant.

Salary and reporting requirements are tightened under the provision. Specifically, employers will be required to pay H-1B workers higher wages and advertise for the position on a special website set up by the Department of Labor. Employers will also have to give first priority to Americans before turning to foreign workers in their recruiting process. These measures may make it more difficult for certain employers to hire foreign workers, especially smaller tech companies. Increases in scrutiny and regulation are a result of fears that employers are taking advantage of foreign workers at the expense of native workers by paying them lower wages. However, given the cost—both monetary and administrative—of hiring an H-1B worker described in an earlier section it is hard to imagine that an employer who could hire a domestic worker would not do so instead.

The biggest regulatory hurdle that could create problems for the most-needed H-1B workers are restrictions on so-called H-1B dependent employers. The Senate bill would impose fees on employers with a high percentage of H-1B or L-1 visa employees. If the employer has 50 or more employees, and more than 30 percent but fewer than 50 percent are H-1B or L-1 employees (who do not have a green card petition pending), the employer must pay a $5,000 fee per additional worker in either of these two statuses. If the employer has more than 50 percent, the employer must pay a $10,000 fee per additional worker in either of these two statuses. Companies would be banned from bringing in any additional workers if more than 75 percent of their workers were H-1B or L-1 employees. This would only apply for fiscal year 2014. In fiscal year 2015, the ban would apply to companies if more than 65 percent of their workforce were H-1B and L-1 workers. In fiscal year 2016, the ban would move to 50 percent. Moreover, H-1B dependent employers would face new outplacement restrictions under the bill. Employers with 15 percent of H-1B employees would not be allowed to “place, outsource, lease, or otherwise contract for the services or placement of an H–1B nonimmigrant employee.”

The threshold in this instance is significantly lower than the provision described above that mandated additional fees for H-1B dependent employers starting with 30 percent H-1B employees. Both of these measures would dramatically affect the business model of certain technology firms, particularly Indian services firms. These firms are some of the heaviest users of the H-1B visa—their employees accounted for about 35,000 recipients of H-1B visas in fiscal year 2012, which is about half the ordinary limit. For a significant number of these firms, both of these thresholds would be binding. It has been estimated that some of them have more than 75 percent of their employees on H-1B visas and that these provisions would “undermine the business model of Indian services firms,” and “the draft language would more broadly preclude Indian firms from contracting visa holders to serve clients.” They would thus not be allowed to hire any new H-1B workers nor to continue their model of outplacement. These restrictions would create a significant problem for the operations of these firms. Furthermore, 480 of the Fortune 500 companies utilize the services of these Indian service firms; as a result, their operations would also be negatively affected by these regulations.

Again, these measures are designed to protect American workers, but it could create difficulties for employers hiring large numbers of workers in STEM fields. A primary rule of optimal policy is that it not distort the productive process. Arbitrary rules governing worker percentages can never be justified on purely economic grounds. In particular, job placement is a classic matching problem, and services firms have emerged precisely because matching is more efficient if large pools of workers are being matched to large pools of firms. By prohibiting the current business model, these provisions essentially prohibit efficient matching.

These provisions are especially inefficient because the visa-related immigration process is complex and costly, and firms that specialize in navigating it would naturally achieve significant returns to scale in visa-related expertise. In addition, searching for skilled workers in international labor markets is also a special skill that should be expected to provide significant returns to scale. The features of the law that essentially would require 480 of the 500 Fortune 500 companies to internalize these costs that are currently borne by consultants would create myriad duplicative infrastructures. Another scenario that would be even worse for the U.S. economy than duplication would be the movement of these service firms abroad. If companies decided to locate offshore, the need for visas would be eliminated, but so would the benefits for U.S. labor markets and U.S. economic growth. The fact that these service companies did not originally locate these positions overseas demonstrates that this is not their first choice; however, a change in regulation of U.S. work visas could drive them to this alternative. Offshoring would create a different type of inefficiency that is not necessary and harms U.S. competitiveness.

It is difficult to estimate the total costs of these provisions, but it is safe to conclude that firms that currently account for approximately half of the flow of H-1B visas under current law would see their visa flow sharply curtailed by the Senate bill. Indeed, the provisions are so specifically targeted at a small group of firms that it seems likely that they are motivated by one of two rationales. First, it might be that these provisions are being put forth to gather leverage with the Indian government in negotiations over other issues. Second, it could be that opponents of immigration generally have inserted them because they will undo the expansion of visas. If the current industry structure matching immigrants to jobs is eliminated, then the higher number of visas becomes irrelevant as a practical matter, as H-1Bs would go unused until an alternative industry structure emerges that provides a matching function under the new constraints. It seems unlikely that firms would invest heavily in doing so, however, the passage of these provisions indicates a political willingness to destroy the business model of firms specializing in this space. Firms that prosper under the new law would rationally expect future laws to destroy their business models as well.

A related concern stems from the fact that the provision restricting outplacement has a very low threshold of 15 percent of workers on H-1B visas. It is easy to imagine a scenario in which large multinational companies in the United States would soon become limited by this provision, especially if they will have to internalize the workers and costs currently provided by the Indian service firms, making the share of foreign-born workers employed by multinationals rise significantly. Under this scenario, not only foreign companies would be affected, but also some of the most successful domestic companies, which are crucial to US economic growth. Given the large benefits from heightened immigration, there is no economic justification for these measures restricting high-skilled immigration.

Other employment related provisions

Another component of the reform plan is a merit-based permanent residence program. From the overview of other countries, it is clear that a merit-based system is now the norm among our trade partners. However, the Senate bill does not conform to international norms, but instead creates two tiers, each of which would account for 50 percent of the available slots (currently set at 120,000 annually). The first tier is the more typical. A worker can earn as many as 100 points with 15 points available for a PhD degree, 10 points for English proficiency, 20 points available based on employment experience, 10 points for entrepre- neurs employing at least 2 employees, 8 points for workers ages 18 to 24, etc. The second tier is aimed toward workers with fewer skills. Most rules are the same except the rules governing English proficiency are more lenient and different professions are targeted—for example, a caregiver would receive 10 points under the second tier. These two tiers once again do not follow from the economic literature that immigrants with the highest skills are the most beneficial to the economy. A system consciously targeting improved economic performance would allocate a higher proportion than 50 percent of these visas to tier 1.

A different provision that is aimed at increasing growth is the creation of a new start-up visa. The Senate bill offers 10,000 new temporary visas to foreign-born entrepreneurs who create at least 5 jobs, raise at least $500,000 and whose companies bring in at least $750,000 in annual revenue. Entrepreneurs that meet these criteria could apply for permanent residence after four years. A recent report by the Kauffman Foundation found that such hypothetical newly-created companies could create between 500,000 and 1.6 million jobs after a decade.

VI) ANALYSIS OF THE ECONOMIC CONSEQUENCES OF REFORM

Economic theory suggests that GDP will increase as a result of an increase in labor force. The relevant question is how much will output increase and what are the specific effects on the labor market and federal revenues.

This report calculates the effects of immigration reform under 3 scenarios: 1) hypothetical scenario where U.S. immigration con- forms to OECD norms, 2) the recently passed Senate immigration reform bill, and 3) the Senate bill without the negative regulatory charges to H-1B visas described in the previous section. The baseline used is the CBO’s Budget Outlook from February 2013. For each simulation, immigration is allowed to increase the workforce in a manner consistent with the literature review above, and then this increment to the labor force allowed to stimulate output through normal growth accounting.

The first scenario posits that the US is out of step with international trends and estimates the effects of increasing immigration to the OECD average as a share of the labor force. The additional influx of immigrants increases U.S. GDP by $2.1 trillion over 10 years and adds $392.8 billion to federal revenues over 10 years as well. Such a change would also allow the labor force to increase by 11.6 million workers over 10 years. The calculation demonstrates the benefits available if the United States were to adjust its immigration levels to international standards.

The second scenario estimates the impact of the Senate bill by estimating how much the new policies would increase the labor force. The labor force is not allowed to grow as much as in the third scenario due to the tighter H-1B regulation for dependent employers. This scenario assumes that the employers who are currently the dominant utilizers of the H-1B visas would be prevented from recruiting new H-1B workers by these new caps, and that the industry is unable to build a new infrastructure that fully utilizes these visas in the near term. This would also limit their positive impact on the remainder of the labor force as described by Madeline Zavodny’s research. This scenario, thus,

is a “worse case” scenario that bounds the likely negative effect of these provisions, although, as it does not include an estimate of the near term disruptions affecting the productivity of 480 of the Fortune 500 firms, it may despite this understate the disruption of these measures. As a result, the effects of the bill fall short of the previous hypothetical scenarios with GDP increasing by only $204 billion over 10 years and revenues by $38.6 billion. The labor force would increase by 1.1 million workers. While the bill would have some positive effects, the regulatory effects of the increased H-1B regulation would hinder the economic growth significantly. Taking the reforms further and eliminating the unnecessary regulations would improve the overall effects.

The third scenario assumes that the Senate bill would eliminate the H-1B restrictions on dependent employers, and the benefits follow. GDP over 10 years would increase by $473 billion and federal revenues by $89.6 billion. The labor force would have 2.7 million additional members over a decade. These results are summarized in Figures 5 through 7.

Figure 5: Labor force change over ten years

figure 7

Source:  Author’s calculations

Figure 6: GDP change over ten years

figure 8

Source: Author’s Calculations

Figure 7: Revenue change over ten years

figure 9

Source: Author’s Calculations

These results differ from the recently released analysis by the CBO. Several factors explain these differences. CBO’s analysis includes estimates of the effects of the bill’s provisions regarding unauthorized immigration, which are outside the scope of this paper. Secondly, departing from its usual scoring approach, the CBO’s estimates rely heavily on second-order behavioral effects in addition to the primary first-order effects. Lastly and most importantly, the CBO anticipates that the strong demand by employers for skilled workers utilizing H-1B visas will continue despite the new fees and restrictions imposed by the Senate bill. This is at odds with this paper’s analysis.

VII) CONCLUSION

According to a recent Fox News public opinion poll, immigration ranks low on the list of issues the American public wants the president and Congress to work on, the economy and jobs top that list.65 The poll presents a false choice. Immigration reform could improve the economic situation of the United States significantly. Economic reasoning outlines the potential for immigrants to add steam to the country’s economic engine and this analysis quantified some of these effects for three scenarios—two hypothetical and one based on the Senate bill. While the Senate immigration reform bill is in many ways a step in the right direction—for example, by increasing the H-1B cap, creating a merit based point system for permanent residence, and initiating a new investor visa—when compared with the international standards of OECD countries, it falls short.