H-1Bs – Immigrants with Degrees Spur Economic Growth

Immigration is often scapegoated for many issues. In reality, immigration boosts the economy.

Thank you for reading our work! Nominal News is an email newsletter ready by over 1,000 readers that focuses on the application of economic research on current issues. Subscribe for free to stay-up-to-date with Nominal News directly in your inbox:

Our goal for 2025 is to hit 3,000 subscribers:

If you would like to support us further with reaching our subscriber goal, please consider sharing and liking this article!

---

Photo by yousef alfuhigi on Unsplash

Followers of US politics may have recently bumped into the immigration debate around particular employment visa holders – H-1Bs (these are employment visas for high wage workers). More broadly, immigration has become a hot-button topic in many countries, especially on how immigration impacts economies. Today, we will look at some of the research on this topic, focusing on high-wage immigration. Next week, we will discuss low-wage immigration. As a preview, the outcomes from both forms of immigration on economies are positive.

The US H-1B Visa

The US immigration system is quite complex. As we previously wrote, the complexity of the system is probably one of the driving causes of illegal immigration. The H-1B visa was created in 1990 to allow for firms to hire college-educated foreigners. The number of annual visas was capped at 65,000 with an additional 20,000 visas for individuals that have a master’s degree or higher.

In order for a firm to hire a foreign national, a firm needs to sponsor the foreign worker. Applications open around April each year and the process used to be on a first-come, first serve basis until all H-1B visas were allocated. Since around 2007, because more applications are filed on the day the application window opens than there are visas (i.e. more than 85,000 applicants), a computer randomly chooses who gets the visa. This is why the process is now known as an H-1B lottery.

The application for the firm for an H-1B sponsored employee is somewhat costly – filing fees range from $2,000 to $10,000, not including any attorney fees. Additionally, the H-1B visa is valid for 3 years and can be renewed once for another 3 years, meaning the employer might have the worker only for a restricted amount of time.

From a foreign worker's perspective, beyond getting a job in the US, the H-1B visa also gives a pathway to permanently immigrate to the US. Unlike many other visas, the H-1B is a ‘dual-intent’ visa meaning a visa holder can apply for permanent residency via a green card. Other visas, such as a student visa, do not allow for this. 

H-1B Lottery

Since the H-1B became a lottery, economists were able to conduct research due to this natural experiment.¹ Mahajan, Morales, Shih, Chen, Brinatti (2024) (“MMSCB”) used the first time the full H-1B lottery occurred (this was in 2007) and looked at the impacts on the firm when one additional worker sponsored by the firm wins the H-1B lottery.

First, an additional worker winning the H-1B lottery at the firm translated into 0.83 additional workers at the same firm. More specifically, one additional H-1B lottery win (versus not having the H-1B applicant win the lottery) resulted in 0.29 more college-educated immigrants (most likely the worker applying for the H-1B), 0.1 more college educated natives (i.e. US citizens) and 0.44 non-college educated natives at the firm.

Now, it may be puzzling as to how winning the H-1B lottery translates into less than a 1 worker increase, and even lower increase of H-1Bs, at 0.29. The reason for this ‘weird’ outcome is that MMSCB are comparing what happened between a firm winning an additional H-1B lottery versus a firm not winning that lottery. When a firm does not win the H-1B lottery, it does not necessarily mean that it cannot hire the foreign worker – there are other visas that allow the firm to hire the employee (for example, the student visa allows someone to work for 1 to 3 years). Thus, not winning a lottery does not necessarily mean not getting the worker, which is why when a firm does win a lottery, we see an increase in foreign college-educated workers at the firm go up by 0.29 rather than by 1. Crucially, however, it appears that winning the lottery has positive impacts on local citizens with around 0.5 extra native workers at the firm.

Small Firms Benefit More

Interestingly, the impact of winning the lottery is greater for small firms (with less than 10 employees). Winning the H-1B lottery at a small firm increases the number of workers by 1 at that same firm, instead of 0.83, where 0.5 is driven by college educated foreigners, 0.18 is driven by college-educated natives, and the remaining 0.32 is non-college educated natives. 

This result for smaller firms is worth emphasizing. When a small firm fails the H-1B lottery, they find it harder than a large firm to employ the foreign worker (the 0.5 effect versus the 0.29 impact). Moreover, if the small firm does win the lottery, it appears it hires more native workers with similar qualifications than a large firm (0.18 vs 0.1), suggesting that the H-1B lottery success may drive firm growth. 

Wage Impacts

So far, we have seen that winning the H-1B lottery increases hiring. How does it affect wages? For firms that had at least one 1 lottery win versus firms that lost all their lotteries:

• Natives that were college educated, below the age of 40 and had less than 3 years of tenure at the firm saw wages increase by 4.1% (i.e. these are the natives that are most comparable to the H-1B applicants based on education, age and experience);

• Natives that were college educated, below the age of 40 and had more than 3 years of tenure at the firm saw wages fall by 5.4%;

• Natives that weren’t college educated saw wages go up by 3.1%.

The majority of workers benefited when a firm won the H-1B lottery. The interesting result appeared between the two groups of younger workers (below the age of 40) that had differential impacts. The workers with short tenure (less than 3 years) saw wages rise, while the workers with longer tenure (above 3 years) saw wages fall. The former may be explained by the fact that the shorter tenure workers learn from their H-1B colleagues (most H-1Bs also have short tenure). For longer tenure workers, based on a separate analysis, MMSCB found that around 3.6% of them end up no longer being at the firm by 2011, which may be the key reason for the falling wage.

It is worth noting that the number of workers that are worse off is quite small – only 4.2% of workers. The remainder benefited when the H-1B lottery was won.

Macroeconomic Impacts of H-1B Immigrants

Beyond the impacted firms, how else do H-1B immigrants influence the wider economy? Dimmock, Huang and Weisbenner (2020) looked at the impact of H-1B lottery wins on venture capital funding for firms, likelihood of a firm going public and patenting. A firm that goes from having about half of their H-1B applications succeeding to winning all of their H-1B applications (firms on average apply for 2.5 H-1B visas in a given year):

• sees a 4.5 percentage point (10% more likely) increase in getting venture capital funding;

• sees a 1.5 percentage point (20% more likely) increase in going public (IPOing on the stock market);

• sees the number of patents increase by 4.8%.

Peri, Shih and Sparber (2015) looked at the growth in H-1B immigrants with majors in STEM (science, technology, engineering and mathematics) in US cities and how it affected wages of both college-educated and non-college educated workers. Peri, Shih and Sparber found that in a city, which saw a 1 percentage point growth of H-1B STEM immigrants in the share of total workers (about double the total growth in H-1B STEM immigrants observed from 1990 to 2010), college educated workers saw wages grow by 7 to 8 percentage points and non-college educated workers saw wages grow by 3 to 4 percentage points. Apart from wage impacts, there were no impacts on employment of natives.

More importantly, Peri, Shih and Sparber found that the inflow of STEM immigrants accounted for about 30% to 50% of the productivity growth of the US between 1990 and 2010. This impact might sound large, but the authors point to two things:

• STEM immigrants accounted for over two thirds of the growth in STEM workers;

• Other research has shown that growth in STEM is responsible for over 50% of US productivity growth over this time period.

Peri, Shih and Sparber conclude that income per capita of US citizens in 2010 was 9.8% higher due to the STEM immigration.

Restricting Immigration Comes with Costs

The H-1B visa in the US is not easy to acquire. Naturally, this comes with a cost to the US. Glennon (2023) looked at how H-1B limitations impacted the decision by firms to move work abroad, i.e. offshore work. Using a measure of H-1B dependency (which is a function of the number of workers at a firm applying for the H-1B visa over the total number of workers at the firm – e.g. smaller firms that hire H-1Bs are more ‘dependent’), Glennon found that a firm with a 1 percentage point increase in dependency (average dependence was 17%) increased hiring in a foreign subsidiary by 3% to 8%, which on average translated into 35 to 90 employees abroad.

Moreover, Glennon found that for each worker at a multinational corporation that had their H-1B application rejected, multinational corporations, on average, create 0.4 jobs abroad. For the most globalized multinational corporations, the number goes up to 0.9 jobs abroad, nearly perfectly offsetting the rejected visa. Lastly, Glennon also found that the increasing immigration restrictions increased the probability of opening up a foreign affiliate, mainly in Canada, India and China.

Restricting College Educated Immigrants

Summarizing the above findings, restricting college-educated immigration appears to:

• Reduce employment of locals;

• Reduce the wages of (most) locals;

• Reduce venture capital investment and IPOing;

• Reduce patenting;

• Increase outsourcing and offshoring.

Many of these effects are compounded when it involves smaller firms.

My Opinion

It is pretty clear to me that the evidence shows significant benefits to the country accepting immigrants. We’ve only discussed a few papers here, but the list of research showing similar results is massive.² The current form of immigration comes at great cost to the US economy. In my opinion, the best way to reform this program is to significantly increase the number of visas, simplify the application and make transferring jobs on the visa much easier. Others have proposed different reforms. 

Highest Salaries

One proposed solution is rather than having a random allocation of the H-1B visa, the visa should go to individuals who are offered the highest salaries. I think this will actually be counter-productive to the US economy. Why? As the research above showed, small firms and start-ups bear the brunt of negative impacts of immigration restrictions. Small firms are usually less able to offer high salaries, not to mention much of their compensation might even be tied in stock options, which would have ‘zero’ value from a salary perspective. Thus, under such a proposal, only the largest firms would hire employees. Moreover, this would further help large firms compete against small disruptive firms, since only large firms would be able to attract talent.

Moreover, the workers that would get hired (i.e. highest salary ones) would most likely be individuals with higher experience and older, and in a very narrowly defined set of fields (not necessarily STEM – for example, fields such as litigation, tax and finance). This fact hurts innovation in multiple fields – we would have less skill diversity and also we would have fewer ‘younger’ people, who have been shown to be the drivers of breakthrough patents.

H-1Bs Push Wages Down

Another common argument is that workers on H-1B visas work for lower wages and thus adversely impact wages of locals. The first part is probably true – being sponsored for an H-1B visa is a form of benefit (like health insurance), which means an H-1B is willing to sacrifice some salary to get this benefit. The latter part, the reduction of wages of locals, has been shown to be false in most cases by the research discussed above.

However, even if one still thinks H-1Bs suppress wages, the solution is not making H-1B access harder. Quite the contrary, it should be made easier with access to the labor market for immigrants widened. Why?

1. Restricting access will increase offshoring, so some of the jobs would not be available for locals anyhow.

2. By making H-1B access easier (and even green card access), the benefit of being sponsored for an H-1B goes down. Thus, potential H-1B immigrants will demand comparable salaries to locals since they’d want the same total package of salary+benefits.

Thus, the emphasis should be on expanding and streamlining the program, as it creates significant value for the US (this would also hold for other countries as well). Although we focused on college-educated immigrants, as we will discuss in our article next week, many comparable macroeconomic results occur for all types of immigrants.

---

Interesting Reads from the Week

1. Article:

   Daniel Parris
   goes over the performance of movie sequels and which sequels can be considered successes. Separately, if you thought the amount of movie sequels is up – they are.

2. Article:

   Jeremy Ney
   points out that homelessness in the US has doubled since 2021 and is at an all-time high. High rents, restrictive housing policy and the expiration of many Covid assistance programs are driving the increase in homelessness.

3. Article:

   Keshler Thibert
   discusses the political history of Guyana and how it has been shaped by its multi-ethnic background. Guyana has also recently become one of the fastest growing economies.

---

If you enjoyed this article, you may also enjoy the following ones from Nominal News:

Immigration (Electoral Issue Series – October 27, 2024) – improving legal immigration channels is more cost-effective at reducing unauthorized immigration than additional border enforcement.

Unions, Strike Action and the Economy (November 14, 2023) – with significant union organizing and strike action occurring in the US, economic research suggests that unions do impact all workers, not just unionized ones. Moreover, unionization threats also have an impact.

To Compete or Non-Compete (April 30, 2023) – why non-compete clauses do not solve any issues, but only create costs.

1. In the hard-sciences (e.g. biology, chemistry), an experiment is when we take two groups and treat one of them with an intervention (for example, a medicine) and argue that any difference of outcomes between the groups is due to the treatment. That is because there shouldn’t be any difference in the group prior to the treatment if the enrollment into the groups was random. In social sciences (e.g. economics, psychology), such experiments are usually not allowed for ethical reasons or feasibility. However, they tend to occur naturally due to laws and regulations that arbitrarily divide people into two groups. For example, two groups with no discernible difference between them: one that receives government intervention and one that doesn’t.

2. Mayda, Ortega, Peri, Shih and Carber (2017), Doran, Gelber and Isen (2022), Mandelman, Mishita and Shen (2024), Clemens (2013), Clemens and Lewis (2024), Hunt and Gauthier-Loiselle (2010) to name a few.