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The H-1B Is A Barrier To The IT Industry's Recovery
Even Milton Friedman Says "there is no doubt" H-1B Is A Subsidy

by Paul Donnelly

Barring new legislation, next year the H-1B will return to its statutory level of 65,000 annually. So immigration lawyers face a choice in the advice they give their clients and, in fact, how they choose to perceive their clients' best interests: to subsidy, or not to subsidy? It's a two edged sword. With Nobel economists adding their weight to the evidence of the crash that the H-1B based model for the IT industry is economically inefficient and even counterproductive, it is time to observe that the interests of the client are not the same as the interests of the bar.

Particularly in firms with big employment practices around high-tech centers from San Jose to Boston, Seattle to Austin, immigration attorneys have gotten used to substantial fees from H-1B employers and, tellingly, from H-1B visa holders themselves. It is a mark of how lucrative the H-1B program, ostensibly to benefit employers, has become for the immigration bar that many savvy H-1B visa holders hire their own attorneys to navigate the process of getting a green card: each 'temporary' foreign worker trying to become a permanent immigrant can provide work for two lawyers: one for the employer and one for the employee. Such a deal!

The cascading mess that the H-1B program makes in the wake of the bust exacerbates the muddle. Many readers are more familiar than I with the ambiguities in the current INS non-policy on H-1Bs who lose their jobs. As a matter of the black letter statute, H-1B visa holders who lose their jobs have lost their legal right to remain in the U.S. The INS' mixed signals about a grace period in which to find another job, which has no basis in the law, has surely at least the potential to cause disaster for tens of thousands of H-1B visa holders who must make major life decisions on remaining in the U.S. out of status, gambling on finding a new sponsor or returning to their homeland and perhaps never returning. But let's not kid ourselves. Nothing makes for more clients like ambiguous, high stakes law.

So it only makes sense that the immigration bar will push for a permanent increase, or expanded exemptions, for the H-1B program during the inevitable debate next year. That means continued opposition to deregulating employment-based immigration, as AILA has done since 1990. Remember: it has never been the AFL/CIO, nor the IEEE-USA that has blocked deregulating job-based green cards. It's been the immigration bar and their employer clients. To represent the interests of the immigration bar, the American Immigration Lawyers Association is naturally inclined toward a complex system that is most likely to result in the most work for the most attorneys.

But is that the best system for the clients - for employers, as well as the employees? H-1B visas have increased in each of the past five years: from 55,000 to 65,000 to 115,000 to 135,000 to 165,000, not even counting the exempt categories. It's just plain silly, not to speak of an insult to our intelligence, when IT lobbyists claim that "the market worked" because a vastly increased ceiling wasn't reached: the number ISSUED went up 60% (from 135,000 in 2000 to 215,000 in 2001, counting exempt categories), even before the crash. This year's numbers are down - but they're not down much. Nor are job-based green cards up sufficiently, even with last year's one-time spike to 187,000. (A number the INS still hasn't published: What are they afraid of?) From 1995-2000, green cards averaged 55,000 under the annual limit, and H-1Bs 55,000 over the statutory cap. That imbalance tells the story.

There are now roughly 700,000 H-1Bs present in the U.S., virtually all hoping to get green cards. Permanent residency based on jobs is parceled out at a rate that has averaged under 90,000 a year for a decade. So employment-based immigration is not a system that can make it up in volume - not if you like old-fashioned Ellis Island citizenship and free market capitalism.

It's also a growing question whether it's the smartest legislative tactic. Everybody knows that immigration issues are not popular in Congress, because there is so little upside: Spencer Abraham did everything AILA and the National Immigration Forum asked him, and the result was defeat in his first bid for re-election. While nobody is making much of an effort for the coveted Pat Buchanan vote, Tancredo's Immigration Reform Caucus has tripled its membership - and the fact that the H-1B is a subsidy hits the IT employer/AILA alliance at precisely its weakest point. Five years ago, NASDAQ made a powerful argument for the H-1B, the green cards vs. guest worker argument be damned. Anybody think that's compelling now?

During the last H-1B debate, Harris Miller, the head of the ITAA, told an interviewer at the Chicago Tribune that the H-1B is a kind of "minor league", a farm team for the IT industry. This spring, I wrote to Nobel prize winning economist Milton Friedman, practically the patron saint of the free market, citing Miller's quote and asking: What is a subsidy?

This is his reply: "The majority of H-1B immigrants do manage by hook or crook to get permanent residence and become citizens, so as a factual matter they are not a 'farm team' of indefinitely temporary workers.

"Yet there is no doubt that the program is a benefit to their employers, enabling them to get workers at a lower wage and to that extent is a subsidy."

When even MILTON FRIEDMAN says "there is no doubt" that the H-1B program is a subsidy, that ought to end the argument. What can the ITAA's Harris Miller say? Or CATO's Steve Moore?

George Borjas of Harvard goes further: "The H-1B program makes a subset of firms more profitable than other firms, and thereby distorts our investment decisions. . The only reason is that the subsidy encourages "over-consumption" of high-tech workers."

For Borjas, the conclusion is blunt: "The H1-B program does precisely what free-marketeers dislike about subsidies: distort our investment decisions."

Let's be clear: it isn't access to the global talent pool that distorts investment decisions. It's access to that global talent pool through the failed regulatory structure of the H-1B and labor certification that provides a subsidy, guaranteeing inefficient and even counterproductive economic decisions.

And how much does the H-1B, as a subsidy, distort investment decisions? That is a very potent question at a time when the collapsing stock values of the very sector that most relied on this subsidy caused the greatest evaporation of wealth in American history. Literally millions of Americans who lost substantial parts of their retirement savings when the NASDAQ cratered will be very interested to realize that their financial futures are much less secure, because a government subsidy failed. Has your Senator or Representative held a town meeting this Congressional recess, taking questions from constituents? The question has come up.

But - the damage is done. The IT industry has already laid off tens of thousands of formerly highly-paid workers, including thousands of U.S. citizens and legal permanent residents, while retaining - if only in minor league limbo - scores of thousands of H-1B visa holders, many of them trying to retain their own counsel without steady income. Beware the LAPO coalition - the laid-off and pissed-off, because Congress listens to voters.

Which is where the second edge of the subsidy sword comes into play. Subsidies don't simply make the market inefficient. They also limit the choices that rational players make. As Jack Kemp observes, when you subsidize something, you get more of it.

The nation's leading expert on labor price elasticity, UT-Austin's Daniel Hamermesh points out, "the changing need for this subsidy as the fortunes of the industry have changed is crucial. One might well have justified a subsidy (which is what it is) when the supply of labor is very scarce. Given the drop-off in demand with the bust, that justification surely doesn't exist any more."

Hamermesh, Borjas and Friedman all recognize that the nature of the H-1B as a subsidy is to provide the IT industry with lower priced workers. Another Nobelist, Gary Becker of the University of Chicago, has said much the same in his Business Week column. Yet every immigration attorney reading this has instantly thought, "but the regulations require." that H-1B workers get paid the going rate.

And that's the point. So long as IT employment is defined by regulations rather than market decisions, the H-1B is actually a hindrance to the IT industry's recovery. Besides, no serious person who is NOT hiding behind the regulations concludes the H-1B does anything but provide cheap labor by delaying permanent residency. Even Rick Swartz, the flexible lobbyist who claims to represent H-1B workers, effectively concedes the point that virtually all H-1Bs would prefer permanent residency. He just lobbies to avoid the deregulation that would make that happen directly.

Friedman's candor in "there is no doubt" calling the H-1B a subsidy attracted some attention from half-baked libertarians, to judge from my email when part of the quote above was first published in Computerworld (please click here). Because the H-1B (and the labor certification process that is its evil twin) are highly regulated, what those regulations require are what we get more of - bogus classified ads for highly specific job qualifications for jobs filled long ago, and the like. I got a call from a fellow who placed classified ads in magazines at the height of the boom a few years back, to ask if I had a list of lawyers who specialized in employment-based immigration. (Now, I'd send him to Then, I sent him to AILA.) But I asked - why do you want a list? He explained that he found that most job ads in IT magazines were NOT placed by the HR people in IT companies, but by their immigration lawyers.

Any immigration attorneys out there who want to defend that practice to somebody whose 401(k) lost 50% of its value?

During the debate over the last H-1B hike, I set up a meeting in Cambridge with Esther Dyson and others who had signed the Open Letter to Congress calling for green cards, not guest worker visas (covered in the New Republic, please click here). For a few months afterward, several of the participants discreetly swapped email debating what to do about the H-1B - and I was struck by one (an immigration lawyer with a very important IT practice) who, while careful not to admit that the H-1B subsidized the IT industry, asked: would that be such a bad thing?

The sensible answer is, that depends on how it is done - which is the question for immigration lawyers, looking at next year's inevitable fight over yet another H-1B bill. Does the H-1B promote U.S. citizenship better than green cards? No. Does it help American workers have long and productive careers? Nope. Does it help provide for a financially secure retirement for the millions of Americans who bet their life savings on the New Economy?


So Milton Friedman gets the last word. As job-based "immigration", the H-1B is a subsidy: " Yet it may also be a sensible part of immigration policy. If we must limit immigration, the sensible way to do so is by auctioning off the immigration permits." Markets are smart and regulations are dumb: the H-1B program is on the wrong side of the NASDAQ crater. Restrictionists are restless, but Congress is going to want to do the right thing by the IT industry: but that will NOT be what is in the zero sum best interests of its immigration lawyers.

The deregulation train is coming down the road, folks. Are immigration attorneys going to be the bar on the rails?

About The Author

Paul Donnelly (email: writes about immigration and citizenship.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.