High Skilled Immigration – the H-1B Visa

The US imposed a $100,000 fee on high-skilled immigrant petitions – a very costly decision for the US

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On September 19, 2025, the US announced that all new H-1B petitions (the H-1B is the visa for immigrant workers with college degrees) would require a payment of $100,000. The size of the fee is sufficiently large enough that it may de facto end high-skilled immigration to the US via the H-1B visa (there are other available visas, although getting approved for them is harder). Such an outcome will end up being very costly for the US and its citizens.

Photo by Ross Sneddon on Unsplash

Immigration – Economic Growth Engine

Skilled immigration is a large driver of economic growth. Specifically in the case of H-1Bs in the US, research has shown that immigrants:

• Increase employment of locals;

• Increase the wages of most locals;

• Increase venture capital investment and IPOing;

• Increase patenting;

• Decrease outsourcing and offshoring.

We have covered the above in our article here, which we will put an extract of at the end of the article. These well-documented positive impacts of immigration, however, continue to be dismissed by politicians and commenters. Here is why I think immigration is misunderstood.

Immigrants and Locals are Not Substitutes

The main argument against immigrant workers is that immigrant workers take away jobs from locals. That is, absent the immigrant, the job of an immigrant would be done by a local. A corollary to that argument is that immigrant workers reduce the wages of locals.

These two arguments rest on two key assumptions:

1. Immigrant workers and locals are perfectly (or closely) substitutable;

2. The total number of jobs is more or less fixed.

To understand why these two assumptions are faulty, let’s look at how economists model the labor market using the canonical Diamond-Mortensen-Pissarides (DMP) model.

Model of Job Formation

In the DMP model, there are two types of agents – firms (or firm owners) and workers. Let’s call the firm owner Frank and the worker, Wyatt. Frank’s firm produces steel, but only if Frank’s firm has an employee. The amount of steel Frank’s firm can produce if it employs a worker is fixed – let’s assume at $20,000 worth of steel. Since Frank needs an employee to produce the steel, he posts a ‘job vacancy’. Frank has to pay every day for this ‘job vacancy’. Since without a worker, Frank only has costs related to the job vacancy, it intuitively follows that Frank really wants to hire a worker.

On the other side is Wyatt, a person looking for a job. Each day Wyatt receives or doesn’t receive a job offer. Every time Wyatt receives a job offer, he decides whether to accept it or not. In that decision, Wyatt takes into account his ‘outside options’ – i.e. what he will forego if he chooses to work.

Some things that Wyatt may be considering when evaluating his ‘outside option’ are the value he gets from leisure, where he can be located, whether he’s receiving any unemployment benefits or if he’s doing other activities (like writing a Substack). This ‘outside option’ takes on a dollar value – how much is the minimum Wyatt would need to be paid for him to choose to work rather than stick to his outside option.

Suppose one day, Wyatt receives the job offer from Frank. Both Wyatt and Frank understand that the total amount of output they will jointly produce is $20,000. Will Wyatt accept this job? This depends on the value of Wyatt’s outside option. If Wyatt’s outside option is $10,000, then Wyatt will accept the job. That’s because if Frank were to offer Wyatt $11,000, Wyatt would take the job ($11,000 > $10,000) and Frank would make a profit ($20,000 > $11,000).

The exact salary Wyatt receives is subject to bargaining, but it will not be lower than $10,000 and no greater than $20,000.

However, if Wyatt’s outside option was $30,000, this job would never form. Wyatt would reject Frank’s job and thus no output would be generated.

Thus, in this model, whether a particular job is created depends on whether the output produced by the firm-worker match is greater than the outside option of the worker. In economics, this is called ‘surplus’ – the difference between the value produced and the worker’s outside option.

Immigration

An immigrant in this type of model is simply another worker. Immigrants may have different outside options compared to locals. For example, immigrants may be more mobile and less attached to a location. Thus, if Frank’s job is located in another region of the country, Wyatt’s outside option value might be $30,000 (Wyatt wants to stay close to his family and friends), while the immigrant’s outside option could be $15,000.

This means that if an immigrant encounters Frank, Frank and the immigrant would start steel production. It’s worth emphasizing – absent the immigrant, Frank’s firm would not exist, as Wyatt would not choose to work there for any wage Frank could offer (the maximum Frank could offer is $20,000, while Wyatt wants a minimum of $30,000).

Jobs are Not Fixed, Workers Aren’t Easily Substitutable

The above example serves to show that immigrants end up in jobs for which there are no locals (or very few locals). That is why making it harder for firms to bring in immigrants ends up hurting the locals – many jobs end up not being created and the ‘surplus’ (difference between job output and worker’s outside option) which benefits locals (firm owners, consumers) ends up being wasted.

Moreover, immigrants and locals often simply have different preferences, which is why they are not easily substitutable. Many potential jobs don’t exist, not necessarily because there aren’t enough workers, but because there aren’t enough workers that have particular job preferences. These preferences can reflect job location, work hours (night vs day shifts) or work type (more or less physically demanding).

The importance of these preferences can be seen in the US doctor market – a significant number of doctors in rural areas are immigrants, which can in large part be attributed to preferences of local doctors who may prefer to live in more urban areas. Banning immigrant doctors will not result in rural areas getting ‘local’ doctors, but rather not having doctors at all.

Immigration – Not a Zero-Sum Game

It is not a surprise that immigrants do not end up competing much with locals. Immigration processes are hard and costly already, absent any additional $100,000 fee. I would hazard a guess that most, if not all firms, would always prefer to hire a local, all else equal. Immigrant workers on average start off with many disadvantages – they have less knowledge of the local market, they may experience cultural and language barriers, and may also lack local certifications, all of which make the immigrant worker relatively less productive to the local. Thus, if a firm hires an immigrant – they probably had a really good reason to do so.

Previously on Nominal News

January 19, 2025 – H-1Bs – Immigrants with Degrees Spur Economic Growth

H-1B Lottery

Since the H-1B became a lottery, economists were able to conduct research due to this natural experiment. 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… Continue reading on Nominal News