A Fee May Improve Quality, Boost Tech Growth

H-1B visas will now require a $100,000 fee, according to a directive issued by President Trump. One goal of the new fee is to improve the earnings of U.S. citizens who compete in the high-skilled labor market. Another goal cited by the president is to ensure that the visas go to the most valuable employees, in contrast to the current system where lottery winners get the visas.

Some basic economics help evaluate the issues. The visa program may now be helping, not hurting, American tech workers. But a lottery is a terrible way to allocate a scarce resource. A higher fee isn’t perfect, but it will improve the system if the fee does not reduce the number of people coming in to the U.S.

H1B Visa Impacts On U.S. Workers

Basic supply and demand, our workhorse economic model, says that an increase in supply will lower the price of the product. With more people available to work in tech sectors, the wage rate will be reduced. This model’s assumption is that we’re looking at uniform quality. To recognize the variability of talent, we need think of the supply and demand for every different level of quality.

Many tech companies focus on quality more than wage. There’s a common belief in Silicon Valley that a great programmer is worth far more than an average programmer. With this view, the H1B visa may bump an American out of a job because a slightly more skilled foreigner gets the job instead. Although politicians love to talk about jobs, that slightly-less-skilled American will get a job, but not at quite as high a pay rate.

The supply-demand model implies that limiting visas would boost, by at least a little, wages for competing American workers. But the model assumes demand for labor is “given.” In reality, the demand for labor is itself a variable affected by policy.

H1B Visas And Tech Company Success

Economists call labor demand a “derived demand.” People are hired because a company’s products are in demand, and the people are needed to sell or produce the product. The demand for labor is derived from the demand for the company’s products. If some workers help develop a new product or a better version of a product, that will induce demand for more workers.

Every year since 2014, and some other years prior, H-1B applications exceeded the maximum number of authorized visas, so a lottery was held. An academic study found that among start-ups, companies that were lottery winners did much better at getting patents, later funding rounds and eventual IPOs (initial public offerings).

Successful tech start-ups increase the demand for workers. The demand will be broader than tech, however, spilling over to marketing, finance and administration, even down to foodservice. So bringing in the tech stars is usually positive for overall employment. In simple terms, bringing in superstars helps average workers.

This superstar approach could be accentuated, not hurt, by the new visa fees. The added cost will certainly reduce the number of applications. And the lost applications will certainly be for the less talented people. The fee may well improve the average quality of the people who are admitted to the country.

A potential problem is that the fee may lower the total number of people admitted. Some companies or job applicants will balk at paying the fee. Although the quality of the remaining applicants will be higher, the number may fall below the authorized limit, and the United States will have fewer superstars coming. Last year, though, the number of applicants was hugely greater than the number of visas. And with fewer applications, the odds of winning the lottery will be higher. That will prevent the number of applications from falling too far, though it’s still possible they could fall below the authorization threshold.

H1B Visas And The Overall Economy

The H-1B program has helped the overall economy by enabling high quality talent to supercharge American tech companies. A small number of native-born tech workers may be earning slightly lower wages because of the influx of foreign workers, but many more employees at lower skill levels are earning higher wages because of the visa holders.

If the United States maintains the limit on H-1B visas, then allocating through an auction would be an improvement over the lottery. A fee that gets the number of applications down to the number of available visas does the same thing, but with a chance of erring on too-high or too-low a fee.