Policy

In a recent seminar at the World Bank, Peter Dixon and Maureen Rimmer presented a paper titled "Illegal Immigration: restrict or liberalize?" showing that tighter border security and internal enforcement actually reduce the welfare for U.S. households; raise the wage rate of the undocumented migrants who remain; and generate dead-weight losses in the form of prosecution and prosecution-mitigating activities. More importantly, they explain that restricting the inflow of undocumented immigrants pushes U.S. workers towards low-paid, low-skilled jobs. 

On the other hand, legalization produces a strong welfare gain for U.S. households since the supply of immigrants (now guest workers) increases and their wage falls.  At the same time, the additional inflow of guest workers has a favorable effect on the occupational mix and average real wage rate of U.S. native workers, allowing native-born US residents to complete their education, enhance their skills, and move up the occupational ladder. 

The paper surmizes that legalization is good for America since it will eliminate smugglers fees and other costs related to illegal entry, and allow immigrants (the former undocumented immigrants) to be even more productive.  If we accept this model, this means that the best action for countries with large undocumented immigrants is to legalize them and to develop a comprehensive temporary worker program.

With remittances expected to fall in 2009 as the financial crisis unfolds, the primary mechanism through which origin countries recoup the efficiency increases achieved by skilled migration will dissipate.  But is there another mechanism, less direct but with long-term implications, through which migrants can benefit their home country.

The notion of the brain drain from developing to developed countries is not new. What is relatively new in the ’new brain drain’ or ’brain gain’ literature is its positive prognosis regarding the economic implications of labor market liberalization.  Yes there is a brain drain and on the whole it is bad for development.  But the migration of skilled workers need not be a zero sum game.  That is, the gain of the host country need not inevitably translate to the loss of the sending country. 

This is the first year that the H-1B visa cap has not been reached during the first 5 days of filing applications. The current cap is set at 65,000, with an additional 20,000 for holders of advanced degrees. It seems that the number of petitions for the H-1B visa this year will be far less than last year. The U.S. Citizenship and Immigration Services (USCIS) put out a statement that “it has received approximately 42,000 H-1B petitions counting toward the Congressionally-mandated 65,000 cap.”

Indian information technology companies have been the largest petitioners of H-1B visas in the past, and now these firms are applying for fewer H1-B visas. For example, Infosys Technologies will apply for less than 3,000 visas as opposed to the 4,500 visas that it requested in 2008.
 
Even Microsoft Corp has applied for fewer H-1B Visas. Brad Smith, Microsoft’s General Counsel said, “I think we’re going to see substantially fewer H-1B applications filed this year compared to last year,” He also mentioned that “the majority of applications will be to extend the stays of existing workers rather than for new hires.”

A major use of H-1B visas has been to facilitate offshore outsourcing. Is the financial crisis having an impact on outsourcing activities? Has the U.S. fiscal stimulus package or the Troubled Asset Recovery Program complicated the hiring of foreign workers for companies receiving federal bailout funds? 

Atlanta Fed Research Economist Federico Mandelman and Andrei Zlate, a PhD candidate in economics at Boston College, have prepared a paper analyzing the role that of migration and remittances during the business cycle. The data they present indicate that when the U.S. economy has outperformed Mexico’s, there were usually more attempted illegal crossings into the United States.

The flow of remittances to Mexico increases during boom times in the U.S. economy as well as during recessions in Mexico.  During economic expansions, immigrant labor becomes relatively scarce, as the increase in the number of immigrants does not keep up with the increase in labor demand. Thus immigrants receive relative higher wages and send larger remittances. The opposite occurs during recessions, when immigrant labor becomes relatively abundant and immigrant wages decline. Border enforcement discourages temporary return migration, as it makes more difficult to re-enter once the economic conditions improve in the recipient economy.