Trump's New Immigration Pause Will Kill Prospects of a Quick Economic Recovery
Banning foreign workers will result in the outsourcing of jobs from America.
The temporary 60-day pause that President Donald Trump declared on legal immigration in mid-April after the coronavirus hit was not so temporary after all. Starting tomorrow, Trump will extend this pause until the end of 2020. But that's not all. He is also expanding the scope of the ban to cover even more categories of immigrants.
Trump is justifying all this as an effort to save American workers from foreign competition. But if America's past experience with restrictionist policies is any indication, the ban will backfire and end up hurting, not helping, American workers, its intended beneficiaries, while crimping America's economic recovery.
Trump's new proclamation extends his April ban on new green cards for anyone other than children and spouses of American citizens because, it maintains, lawful permanent residents get instant "'open-market' employment authorization documents" that allows them to immediately "compete for almost any job in any sector of the economy" with American citizens. In addition, it will also impose a moratorium on temporary work visas including H-1Bs for foreign techies, H-2Bs for low-skilled non-agricultural work, J visas for summer jobs, and L visas for intra-company transfers. All of these, he says, "present a significant threat to employment opportunities for Americans" given that the "overall unemployment rate in the United States quadrupled between February and May." (None of this explains why he banned H-4 visas for the spouses and dependents of foreign techies, something that will cruelly split families. He is poised to cancel the work authorization for H-4 visa holders so there won't even be the theoretical possibility of any of them competing with American labor.)*
It would be possible to take Trump's economic rationales for slamming America's door shut now more seriously if he hadn't also been trying to do the exact same thing when the unemployment rate was at a record low. Indeed, his labor interventionism shows that he is as hostile to letting the free market regulate economic decisions as the socialists he reviles.
There are already significant obstacles built into labor and immigration law that make it far more time consuming and costly for businesses to hire foreign workers. So businesses already automatically prioritize American workers over foreign workers. As Sen. Lindsey Graham (R–S.C.) tweeted after Trump's announcement: "Work visas for temporary and seasonal jobs covering industries like hospitality, forestry, and many economic sectors can only be issued AFTER American workers have had a chance to fill the position."
The fact of the matter is that American employers only hire immigrants to fill niches at the top and the bottom end of the labor spectrum where qualified Americans aren't available or willing to take jobs. Restrictionists like White House aide Stephen Miller, the real architect of Trump's immigration pause, claim that starving businesses of foreign workers will force them to invest in training domestic workers and/or paying them more, resulting in more jobs and higher wages for Americans.
But this is the flawed logic of central planning. It ignores the fact that there are limits to the price increases that a market can bear. Businesses will automate functions that can't be performed abroad and will outsource other functions to keep a lid on the costs of a key input—all of which will hurt, not help, American workers.
American businesses did the first after President John F. Kennedy posthumously succeeded in killing the bracero program in 1964 that had allowed American farmers to hire around half a million Mexican guest workers on a seasonal basis. Did American workers see any windfall due to that? No. A study by Michael Clemens and Hannah Postel of the Centre for Global Development and Ethan Lewis of Dartmouth College found that the end of the program did not result in more jobs or higher wages for Americans in states that had relied on it. There was a small rise in native employment and wages for a short while before it all evaporated as farmers that relied on braceros switched to machines.
Interestingly, Trump's immigration ban does not extend to H-2A visas for farm workers. In fact, that's the one category of visas that has expanded on his watch. Why? Because agriculture is the mainstay of many red state economies whose leaders have indicated that they would not take kindly to being cut off from a key source of labor. Trump has also carved a very narrow exemption for foreign workers "involved with the provision of medical care to individuals who have contracted COVID-19" and who are "currently hospitalized."
But high-skilled foreign workers that blue states like California, Washington, and New York depend on are out of luck. What is likely to happen in these states? Will they rush to hire Americans with big bucks in hand? Not really.
For starters, there just aren't enough high-skilled Americans sitting around to be hired. The unemployment rate last month—the peak of the pandemic—for computer jobs was 2.5 percent compared to the overall rate of 13.3 percent for all jobs, according to an analysis by the National Foundation for American Policy.
So as high-tech companies are choked off from hiring foreign workers, they'll start outsourcing more operations abroad. This is what happened in 2004 when Congress slashed the H-1B cap from 195,000 to less than half, according to research by Wharton School of Business professor Britta Glennon.
She examined the operations of multinational companies after the reduced cap and found that they increased employment in their existing affiliates abroad and also were more likely to open more affiliates. The trend was most pronounced among R&D intensive firms and computer software industries whose services were more easily outsourced.
The chief beneficiaries of the outsourcing boom, unsurprisingly, were China and India, the main donor countries for high-skilled foreign talent. But Glennon also found that Canada became a hot destination for multinational companies. Given its immigrant-friendly policies and proximity to the United States, many companies opened affiliates in America's northern neighbor, often to hire the very same foreign techies who could not land H-1Bs in the United States.
Although Glennon's research was limited to multinational companies, she believes that many American companies at the time also formed partnerships with companies abroad, a trend she expects will accelerate in the wake of the new H-1B restrictions.
This will be bad news for American workers. As University of North Florida professor Madeline Zavodny has found, a 1 percentage point increase in the share of H-1B workers in an occupation reduces the unemployment rate in that occupation by about 0.2 percentage points and boosts the earnings growth rate by about 0.1 to 0.26 percentage points. Indeed, each H-1B supports around 1.83 native jobs overall.
The more Trump tries to turn America into a fortress, the louder will be the sucking sound of jobs fleeing overseas, to use the immortal words of failed presidential candidate Ross Perot.
There will be other economic downsides too. Measured by the number of patents, Glennon found that innovation increased in the foreign affiliates of multinational companies, benefiting the countries where they were located. Likewise, economist Charles I. Jones found that the increase in the share of scientists and engineers explains about half of total factor productivity gains in the U.S. in recent decades.
It is never a good idea to spurn foreign talent of any kind, low skilled or high. But it is a particularly bad time to do so right now given that the generous unemployment benefits that Congress handed Americans in the wake of the pandemic have already dried up the domestic source of workers for employers wishing to reopen. With another source of labor cut off, many more businesses will be forced to shut down, making the quick economic recovery that Trump so desperately wants that much less achievable.
A savvy businessman would understand that.
*The original wording erroneously stated that H-4 authorization had already been cancelled.
