Immigration Reform Banner

Immigration Reform: Toward Free Trade in Labor

Tuesday, June 18, 2013

Most of the modern discussion on immigration policy is directed to the question of which aliens who enter into the United States should be allowed a path to citizenship and why.  In dealing with that topic, Gary Becker and Edward Lazear have powerfully argued that a market system is the best way to attract “people with skills and vision” into the United States. That program is correct as far as it goes. But in a sense it does not go far enough.  Immigration policy cannot concern itself only with the long and complex progression from entry to citizenship.  It must also deal with another reality of the modern integrated global economy, namely, the way in which the United States—and for that matter other nations—admit individuals on short-term work visas.

These visas are of immense importance especially at the higher echelons of the workforce, for nothing is more common today than for key employees in global firms to do short-term tours of duty in the United States, even when they have no intention to seek permanent residence or U.S. citizenship. In two important ways, these cases present far fewer problems than do foreign entrants into the United States in search of permanent status.  Often these business entrants come with substantial income and without families, and hence do not put the kinds of pressure on domestic social support systems than do entrants with large families and limited levels of support. In addition, since these workers do not aspire to citizenship, they will not obtain the right to vote, which adds an important political dimension to their entry into this country.

Given these two features, it is proper to think of these short-term visitors as labor inputs in voluntary markets with no systematic negative externalities. At this point, as I have argued here the proper treatment of their participation in these labor markets should follow the same approach that ideally applies to the movement of goods in international markets: free and open markets, which applies to entry and exit across national boundary lines.  The key principle of international trade in either goods or services is, or at least should be, that two or more sovereigns so organize their affairs that all transactions in goods and services follow the same competitive principles that govern a well-functioning domestic market.  Indeed one great advantage of the United States is that its constitutional jurisprudence by and large prohibits any state in the union from imposing barriers to entry and exit of either labor or goods that are not narrowly justified by the need to protect against such clear perils as contaminated goods. The competition that takes place, say, between Michigan and Tennessee in labor markets operates as a powerful force for deregulation in domestic markets, which in the end helped erode the strong pro-union structure in Michigan. When faced with competition from right-to-work states, Michigan recently felt compelled to pass a right-to-work law over fierce union opposition to prevent the further loss of business to low-cost labor states.  Note that under the federalist system, there is no quota on the number of workers that can move from state to state, and no requirement that they gain any certificate that proves that they are competent to work.

There are reasons why this federal will not work in the same way in international markets—chiefly because the number of potential foreigners who might wish to enter could overwhelm the overall system of social supports. That influx cannot happen between states within a single nation that imposes some limits on immigration from overseas.  But if excessive entry turns out to be a problem, the correct response is to set up a number of slots for admission and then allow an open bidding system for slots of some specific duration.  Either domestic firms or foreign immigrants could bid for the slots (which need not be of uniform duration), and the sole obligation on the winners is to register the workers who have entered under the program so that they can be asked to leave when their appointed time within the country is over.

The current system of H-1B visas in the United States falls far short of that ideal.  Far from having that characteristic, the temporary visa program in the United States is shot through with protectionist shortcomings that go a long way to vitiate the gains that the United States gets from this visa program.  The program stands condemned in its own words, when it sets forth “certain prerequisites for employers wishing to employ H-1B workers." Thus the required file a Labor Condition Application contains at a minimum these indefensible provisions:

  • Pay the nonimmigrant workers at least the local prevailing wage or the employer's actual wage, whichever is higher; pay for non-productive time in certain circumstances; and offer benefits on the same basis as for U.S. workers;
  • Provide working conditions for H-1B, H-1B1, or E-3 workers that will not adversely affect the working conditions of workers similarly employed;
  • Not employ an H-1B, H-1B1, or E-3 worker at a location where a strike or lockout in the occupational classification is occurring, and notify ETA of any future strike or lockout; and
  • On or within 30 days before the date the LCA is filed with ETA, provide notice of the employer's intent to hire H-1B, H-1B1, or E-3 workers. The employer must provide this notice to the bargaining representative of workers in the occupation in which the H-1B, H-1B1, or E-3 worker will be employed. If there is no bargaining representative, the employer must post such notices in conspicuous locations at the intended place(s) of employment, or provide them electronically.

The obvious intention and key defect in the system is that it imposes an elaborate set of requirements intended to protect the wages now paid to American professionals from direct competition by foreign labor.  It seems quite clear that no domestic market works well when the legal system imposes barriers to domestic competition. The same is true when foreign competition is on the table.  The great vice of the system is that it assumes that the loss in wages to some direct competitors should be treated as if it were a social loss, when in fact the opposite is true.

The reason why these losses are termed “pecuniary externalities” in ordinary parlance is that there is a negative correlation between the position of the disappointed competitor and overall social welfare.  Looking at disappointed competitors ignores the gains to others individuals, both domestic and foreign from the increased competition in given market sectors.  Those gains are found in the increased opportunities that these new entrants give to other workers, which surely happens when the new entrant establishes or expands a business.  And it ignores the systematic gains to consumers from the combination of lower prices and superior services.  Just that same set of relationships emerges in the international market, which means that it is both costly and dangerous to require firms to present elaborate case-by-case explanations as to why they should be allowed to continue to hire a given worker for a given position.  This nation could cut administrative costs, eliminate political intrigue, and improve overall productivity if it stripped out any and all government oversight with respect to these temporary visas.  The key task of the government is to pick the number and length of these visas and then get out of they way.  The fine-tuning of labor markets is a consistent loser domestically.  It works no better in dealing with temporary workers from outside the United States.