Understanding immigration and trade: what will a shortage of skilled labor do to U.S. competitiveness?

Three years ago I spoke at a meeting of a trade association known as the Biotechnology Industry Organization. Walking down the aisles, I was struck by the odd juxtaposition of booths. Most featured new biotech products, but about a half dozen showcased immigration firms that help biotech firms navigate their visa problems for key employees.

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That casual observation solidified a profound truth of immense concern to CEOs. Such kiosks continue to spring up because of the scarcity of H-1B visas. These vital documents pave the path of entry into the U.S. by individuals with specialized and technical knowledge in engineering, health care and computer sciences. Over the past several years, the available quota of these positions has been 65,000. In 2006 that limit was met before the onset of the fiscal year. In 2007, all the visas were gone in two days. Clearly the available numbers are insufficient to cover demand in growing industries. Worse still, the sharp restrictions often make it impossible to hire the many foreign graduate students in American universities at a time when our troubled educational system finds it difficult to churn out large numbers of U.S. citizens skilled in these technical areas. It only adds insult to injury to impose heavy fees on these visas, which are then channeled into job training programs that are little more than unearned subsidies for some domestic workers.

To explain the sharp restriction on the annual number of H-1B visas, CEOs need look only to the same protectionist forces that everywhere block economic and social advancement. The U.S. Department of Labor is charged with the impossible: to insure that the admission of foreign workers does not displace American workers or adversely affect their incomes or working conditions.

The usual method for making this determination is by focusing on job losses to workers who are in direct competition with the new foreign workers. But that procedure deliberately and systematically ignores the huge gains created throughout the economy when these foreign workers produce goods and services that make their employers and other U.S. firms more efficient, thereby creating other jobs and producing better goods at lower prices. Instead, our immigration and visa policy has fallen prey to the same form of selective tunnel vision that leads to opposition to the outsourcing of jobs to foreign countries, or to demands for a renegotiation of the North American Free Trade Agreement, both staples of the Clinton and Obama campaigns.

This sorry episode has long-term consequences for both business and social policy. The CEO whose firm cannot bring foreign workers into the U.S. may instead set up new facilities overseas in order to take advantage of their skills. If the U.S. should impose differential taxes on firms that outsource, CEOs will start to think of contracting out services to independent firms overseas. If the reach of regulation extends that far, then American businesses could be displaced by foreign ones, which allow for the more efficient combination of capital and labor, leading to greater job reductions at home. It is imperative therefore for CEOs to fight this regulatory spiral at every turn, by making it clear to our political leaders--both parties have been guilty of trade offenses--that no good can come from this incessant and counterproductive regulatory agenda. The key move is to expand the number of H-1B workers allowed into the U.S.

Addressing Illegal Immigration

The chronic shortage of H-1B visas is symptomatic of a larger confusion about free trade, free immigration and the relationship between them. As a matter of first principle, immigration policy is always a harder nut to crack than trade policy. Let foreign goods into this country, and they circulate in the general economy like domestic ones. These goods do not vote, they do not buy housing, they do not send children to public schools and they neither commit crimes nor rescue strangers. Letting a person into a country carries with it all these complications and more. The new entrant does not just occupy a role as an employee, but as resident, taxpayer, patient and parent.

Immigration, for better or for worse, has the power to transform our demographic balance by altering the mix of political power and social pressures. Open immigration could lead to an influx of people, straining our public services and infrastructure. Make no mistake about it, a social democratic system with generous public benefits has to get tougher on new immigrants. But how?

The hard trade-off arises from the simple fact that the operation of the U.S. economy is heavily dependent on immigrant labor. Immigration thus presents greater challenges than H-1B visas that let in short-term workers whose presence surely counts as a net contribution to our overall economic welfare. Increasing their numbers and offering an easy path to early citizenship will do much to improve the material and social operation of our economy and social order.

In contrast, illegal immigration is more intractable given the credible fear that these immigrants will bring to the U.S. fewer marketable skills while placing greater strains on the nation's physical infrastructure and social services. Coping with this problem does not get any easier given this insistent dilemma. Allowing illegal immigrants to stay lets them jump the queue over others who have sought legal entry into the U.S. But treating them as wrongdoers creates immense dislocations nationwide, as the federal laws require all firms large and small to sniff out illegal immigrants in their employment ranks. It will also place a crimp in the local economy, as long-established illegal immigrants will be reluctant to improve their houses or buy furniture if they could be sent packing at a moment's notice. Few consumer durables fit into a suitcase.

Using Trade Policy to Help with Immigration

There is at present no social consensus on how to crack the immigration nut. I suspect, however, that most CEOs are reluctant to crack down on illegal immigrants given the economic and social dislocations that will follow. So is there anything else that could be done to ease the burden?

Now the interconnection between free trade and immigration becomes much more explicit. One reason illegal immigrants take such risks to enter into the U.S. from, say, Mexico or Central America, is to raise their standard of living by working inside the U.S. and to send home remittances to their families (which are far more effective than foreign aid). One reason why wages at home are often low is the strong resistance to free trade with their home countries.

As usual, the strong protectionist impulse leads to demands that Mexico or Central American countries, whose wealth is a fraction of our own, adopt labor laws or environmental protections that match American standards, even if the former frustrate efficient growth and the latter set up an unfortunate imbalance between the existing low level of private goods and an unduly high standard for public goods.

One hidden cost of this anti-free trade agenda is that it aggravates the immigration problem. Let the economic opportunities increase at home, and the willingness of persons to enter the U.S., legally or illegally, will diminish. Why take on a heavy burden if the gain from the journey is reduced? By the same token, if economic conditions improve at home, then there will be some tendency for immigrants, especially illegal immigrants, to return. The free trade alternative thus takes the pressure off the immigration apparatus, which now is faced with the unappetizing choice of trying to keep people from entering or forcibly expelling them once they are here. The increased level of prosperity in other nations will help reverse the immigration flow. It will also help improve the skill sets of those immigrants who do come here, whether legally or illegally, by improving their education at home.

Indeed, it may be possible to do more through persuasion rather than coersion. One possibility is the creation of an amnesty that lets all persons now illegally within the U.S. leave without penalty and then return without penalty within one or two years of their departures. That option allows immigrants to see loved ones from whom they have been separated for years. It also makes it likely that some who return home might choose to stay there. Voluntary sorting is far more likely to enrich all countries.

The Short and the Long Term

The range of issues raised with illegal immigration are far from likely to generate any kind of uniform consensus. The full array of explosive issues makes it quite unlikely that CEOs and other business interests will reach a uniform position even on a question that so strongly influences our economic environment.

But no such ambiguities exist with respect to the H-1B visas. Expanding their number should strengthen the competitive position of American firms and improve our cities and towns at the same time. Resisting protectionist impulses is far better than infighting among American firms for some strategic edge under our current dysfunctional rules. A clear and consistent national policy on H-1B visas is something that CEOs should demand from political leaders on both sides of the aisle, now and in the foreseeable future.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution. His latest book is Supreme Neglect: How to Revive Constitutional Protection for Private Property.