HOW ATTRACTING MORE FOREIGN SKILLED WORKERS

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How Attracting More Foreign Skilled Workers and Entrepreneurs Can Improve the U.S. Immigration Policy

Giorgio Tomassetti

ECO 523-01: Topics in Public Policy Presentation Date: November 17, 2010

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS Introduction

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Immigration is an extremely complex topic of our time and the future of the United States will be partially shaped by the decisions and the actions taken today on this matter. In this paper, I want to answer the following question: how can we improve our immigration policy by attracting the best minds from all over the world and why this is important for the U.S.? After a brief description of the issue of immigration in general terms, I will explain why the U.S. needs to improve its immigration system and how foreign skilled workers and entrepreneurs can help the U.S. achieve this goal. Immigrants are a heterogeneous group of people and by focusing on those individuals that bring greater benefits than costs, we can make immigration a beneficial phenomenon for this country. For instance, my research shows that new firms are essential for the economy of this country, and they are also the main source of new jobs. Foreign entrepreneurs and skilled workers can therefore bring great benefits to the U.S. economy. In order to understand how we can improve the system, I will outline the U.S. immigration law and point out the fact that it does not reward wealth creation. Then I will describe how we can use some economic concepts to better understand the issue of immigration. Finally, in the last part of my paper I will explore some improvements that can be made in the current regulation in order to attract more foreign skilled workers and entrepreneurs. The research I conducted convinced me that in order to improve the overall wellness of the country, it is more efficient to take a libertarian stand when making decisions that affect those who can potentially benefit our society and our economy. The best way to implement this thinking is by providing immigrants with an easier immigration process and less uncertainty on the final outcome. In addition, a specific Visa for entrepreneurs would also be a significant improvement of the current policy.

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In discussing my argument, my primary focus will be on efficiency; therefore I will mainly analyze the conflict between experts and markets, while politics will remain a secondary issue for reasons that I will then explain.

The immigration Issue

Before analyzing the current immigration policies, it is necessary to have an adequate understanding of the issue in general terms. The world population is projected to reach 9 billion people by 2050, from the current 6.8 billion and net migration to the more developed regions will be approximately 2.4 million per year, 1.3 million of which are directed to Northern America (World population prospects: the 2008 revision, 2009). It is therefore crucial that the policies that control this phenomenon are able to set the right combination of incentives in order to stimulate mainly the favorable results that immigration can have on this country, while trying to prevent the undesirable outcomes. One of the main ideas that I want to point out in this paper is that immigrants are not a homogeneous group of people and, therefore, they should not be regulated in the same way. While it is true that they share some common traits, they have various impacts on society and on the economy. For instance, an illegal immigrant does not contribute financially in terms of taxes paid, while a foreign skilled worker could represent a source of wealth for the community he lives in and, more generally, for the entire country. We can therefore divide immigrants into categories and it is reasonable to analyze each category separately.

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS In this paper, I will focus on skilled immigrants and foreign entrepreneurs because my research suggests that the U.S. is losing international competitiveness in this dimension1 and,

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more importantly, evidence suggests that these immigrants can have great benefits to the society and the economy of a country. The biggest problem that foreign skilled workers and entrepreneurs have to face is their legal status while in the United States. For instance, there is not really a Visa for entrepreneurs in the United States. This is a surprising finding if we consider that, for example, a recent study from the Ewing Marion Kauffman Foundation shows how “without startups, there would be no net job growth in the U.S. economy” (Kane, 2010, p. 2). I will then describe the different ways by which it is possible to obtain a Green Card, but first I want to explain the benefits that skilled immigrants can bring to this country.

Benefits of Skilled Immigrants

In this section I will analyze the main benefits that foreign skilled immigrants and entrepreneurs have on the economy of this country. According to Legrain (2007), skilled migration brings three main benefits. First of all, immigrants bring different skills and qualities that can be extremely useful, especially in the business world; also, cultural diversity has a positive impact on society. Second, talented foreigners may boost innovation and, finally, there are substantial benefits in having a significant pool of talent in a single location. For instance, places like Silicon Valley have been successful in

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For instance, according to the Business Administration's Office of Advocacy (2010), the U.S. has sunk to third place when it comes to fostering entrepreneurial creativity.

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS attracting many foreign entrepreneurs, as we can see from Figure 1.

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60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

54.40% 43.80% 35.80% 31.60% 31.00%

26.20% 24.30%

23.40%

Immigrant‐founded startups as a percentage of total startups in tech centers
Figure 1: Immigrant-founded startups as a percentage of total startups in tech centers2

According to a recent study commissioned by the National Venture Capital Association (Anderson & Platzer, 2006), 40 percent of U.S. publicly traded venture-backed companies in the high-tech manufacturing sector and 25 percent of all the venture-backed companies that have gone public in the last 15 years were started by immigrants. If we compare this data with the number of legal immigrants, only 8.7 percent of the total population, we understand how valuable the contribution of immigrants to the economy is. Google, Yahoo, eBay, Intel and Sun Microsystems are just a few of the many companies that were started by immigrants.

It is interesting to notice that immigrants tend to share the same personality traits of successful entrepreneurs. These personality traits are: the need for achievement, a propensity for risk-taking, a tolerance of ambiguity, tenacity and passion. Also, the social networks of
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Source: (Wadhwa, Saxenian, Rissing, & Gereffi, 2008)

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immigrants usually have greater degrees of network closure and greater brokerage opportunities, which usually equals in an increase in the likelihood of firm survival in high-growth and turbulent industries (Dalziel, 2008). Therefore, statistically, among successful entrepreneurs, immigrants tend to perform better than non-immigrants3. This means that investing in highly skilled immigrants is economically convenient for a country.

Gianmarco Ottaviano and Giovanni Peri tried to calculate in economic terms the impact that immigrants have on the economy. They compared the rents and the wages in 160 U.S. cities between 1970 and 1990 with the proportion of foreign-born residents and they found a positive correlation between the two; the more foreign-born residents, the higher the wages and the rents. They also proved that “a more multicultural urban environment makes US-born citizens more productive” (Ottaviano & Peri, 2005).

After explaining the main benefits of skilled immigration, in order to make policy improvements, we first need to analyze the current immigration law.

U.S. Immigration Policy

The U.S. immigration system allows foreign people to live legally in this country if they either have a Green Card or a temporary Visa. A United States Permanent Resident Card, also known as a “Green Card,” is an “identification card attesting to the permanent resident status of an alien in the United States of America” ("Permanent residence (United States)").

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Although the research has been conducted on a pool of people who immigrated to Canada as adults, the results can be applied to the U.S. economy as well.

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS There are three main ways to obtain a Green Card (USCIS, 2009). First, it is possible to receive a Green Card through a family member. This path is the least complex and many foreigners apply for this one even if they are here for other purposes. For example, many entrepreneurs who married an American citizen received their Green Card through family and not through investment. The second way to receive a Green Card is through a job offer or an investment. The main problem with the Green Cards received through employment is that only a limited number of them can be granted each year. Also, the process that the employer has to go through in order to sponsor his employee is extremely complicated, a positive outcome is not guaranteed, and the process usually takes more than a year. In a survey conducted by the NVCA (Anderson & Platzer, 2006) 66 percent of the responders said that “current U.S. immigration laws affecting skilled professionals harm American competitiveness.” In the case of immigration through an investment (EB-5 Visa), it is necessary for the immigrant to invest at least $1,000,000, or $500,000 in a high unemployment or rural area, and to create or preserve ten permanent full time jobs. This type of Visa is the only one that rewards an economic contribution but, unfortunately, it is not particularly popular among entrepreneurs,

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since it is actually more targeted for investors. Also, the investment required by the EB-5 Visa is much greater than the average cost of startup, which is approximately $31,150 (Scott, 2009). The third way to obtain a Green Card is through refugee or asylum status. There are other ways to obtain a Permanent Resident Card, but they are not relevant to my paper. Finally, it is important to notice that the U.S. allows approximately 1 million immigrants every year, which corresponds to only 0.3 percent of the total U.S. population.

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Market Response to the Regulations

Refugees and  Asylees, 15.7% Diversity  program, 4.2% Investors, 0.3%

Other, 1.3%

Employment,  12.4%

Family, 66.1%

Figure 2: Legal Permanent Resident Flow by Major Category of Admission (2009)4

Now that we are aware of the different kinds of Green Cards, we need to analyze how there are actually being used. As we can see from the chart, 12.4 percent of them are obtained through employment and, more importantly, only 0.3 percent were given to investors. Currently the Investor Visa is capped at a 10,000 annual quota but, for example, in 2009 only 3,688 people5 were granted the immigrant investor status (U.S. Department of Homeland Security, 2010). Of these 3688 people, only 1,290 of them were given to applicants, while the other 65 percent went to the spouses and children of EB-5 Principals.

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Source: (Monger, 2010) This number is much higher than the average between 2001 and 2003, which is of only 136 people.

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS If we compare this number with the 47,879 people who immigrated through the Diversity

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Visa Lottery6, which is given at chance, we understand that the current immigration system is not so focused on promoting the creation of wealth in this country. Indeed, as I pointed out at the beginning of this paper, immigrants are a heterogeneous group of people, and they have different impacts on society and on the economy.

Economic Consequences of Immigration

Immigration is a very complex issue, not only from a cultural point of view, but also in economic terms because it implies the movement of factors of production, which changes the relative quantities of factors (Bodvarsson & Van den Berg, 2009). In this section I want to address the main economic consequences of immigration. Immigration can be analyzed in terms of demand and supply. Indeed, there are constantly people who want to immigrate to another country, but at the same time, only a limited number of them will be able to do so given the numerical restrictions that many countries have, including the United States. This situation creates scarcity and therefore the ability to immigrate has a value for the immigrant, which is usually greater than the sum of the various expenses that the immigration process requires. On the other hand, the value that an immigrant can bring to a country can be significant, both in terms of money and culture. Also, for a complete analysis, we should consider the impact that second-generation immigrants have. Although second-generation earnings are influenced by the first-generation immigrant earnings and vary based on the country

The Diversity Visa Lottery is a lottery that assigns 50,000 visas each year to those individuals who are from countries with low rates of immigration to the U.S.

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HOW ATTRACTING MORE FOREIGN SKILLED WORKERS of origin7, data show that children of immigrants tend to have higher education and wages than children of natives (Borjas, 2000). In order to estimate the impact of immigrants on the economy, we should examine how they perform in both the short and the long-run. If we only consider skilled workers and entrepreneurs, we can conclude that these immigrants perform quite well from the beginning. Empirical evidence shows how immigrants with the highest level of effective human capital when they immigrate make the largest post-migration investment (Borjas, 2000).

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Currently the U.S. immigration system restricts the number of people that can immigrate to this country. A quota in this case can have multiple effects, depending on the costs and benefits associated with each category of immigrants. For example, a quota on skilled immigrants is inefficient because it reduces the overall benefits that this country can receive from immigration. Immigration policy is highly regulated and there is very little space for freedom of choice for both immigrants and Americans who want foreign people to immigrate to the U.S. Therefore we can conclude that domestically the immigration market does not function like a competitive market. Nevertheless, on an international level, people have the freedom to decide to which country they immigrate. Different categories of immigrants have different demand curves; some of them are very inelastic and would be willing to pay a high price for having the opportunity to immigrate to the U.S. while other people’s demand curve can be extremely elastic. For example, a skilled worker could consider other countries other than the U.S. if immigration regulations here were too costly and complicated.

Immigrants from countries like Germany and the United Kingdom usually have higher immigrant earnings than those immigrants who come from countries with lower immigrant earnings, such as Mexico for example (Bodvarsson & Van den Berg, 2009).

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Deciding How to Decide

As I stated in the introduction, my primary focus will be on the conflict between experts and markets, while politics plays a secondary role. While it is true that immigration policy is a domain of exclusive federal competence in the United States, it is also necessary to realize that, given the complexity of the issue, politicians tend to make decisions based on what the voters demand and the experts’ advice. In my opinion, having Congress making decisions on immigration policy is quite an effective solution because a decision made by Congress is usually the result of a shared agreement, which should translates in public support for the legislation and therefore greater stability. Stability is particularly valuable because the immigration process for an immigrant usually lasts for more than one year and changes in regulations make the process even more complex. In other words, an artificial equilibrium is created by institutions.

How to Think About Immigration Policy

Now that we have a better understanding of the effects that skilled foreigners can have on this country, we need to determine which sets of principles we should use when making decisions on related regulations.

When we improve our immigration system, we want to increase the overall wellness of the country, both in economic and cultural terms. Thus, a utilitarian prospective8 should be used when dealing with general immigration law. However, in order to make our country more
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Thinking in terms of utilitarianism implies researching the greatest happiness for the greatest number.

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS attractive to foreign entrepreneurs and skilled workers, we need to create a set of incentives for

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them to come. For this reason, when talking about immigrants that can potentially create wealth in the U.S., a more efficient way to design the regulations is by taking a libertarian stand. The libertarian point of view that immigration policies on skilled workers and entrepreneurs need is, in my opinion, the one of John Stuart Mill. Mill (1859) thought that libertarianism was a tool that society could use to achieve greater social welfare. The idea of libertarianism is that if each one of us pursues his own best interest without harming others, the whole society will be better off. However, Mill suggests that individual freedom could have some restrictions. This view of libertarianism best fits the issue of immigration since in order to have a healthy immigration, some form of restriction must be in place, even if minimal. Thinking in terms of libertarianism when dealing with some categories of immigrants in order to achieve a great objective, which is greater welfare, is a paradigm shift that can have a beneficial effect on the U.S. economy.

How to Improve the System

Having explained the benefits and the consequences of skilled immigrants, we can now explore some possible improvements of the current regulation.

Robert Litan, vice president for Research and Policy at the Kauffman Foundation, believes that the U.S. should enable the thousands of foreign students in America and the millions of engineers, scientists and other highly skilled workers here on H-1B temporary Visas, to obtain a Green Card if, for example, they can hire 5 or 10 American nonfamily members (Friedman, 2010). From a strictly economic prospective, forcing skilled immigrants to leave the country, due

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS mainly to an insufficient number of Visas and a complex immigration process, represents a negative return on investment for the country.

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An interesting example of how interest groups are trying to improve the current immigration system is the “StartUp Visa Act”, which is a legislation proposed by a group of venture capitalists that would introduce a two-year Visa for any immigrant entrepreneur who receives $250,000 in capital from American investors. After that, if the entrepreneur has created at least five full-time jobs, raised an additional $1 million or had $1 million in revenue, he would be allowed to become a permanent resident (Kerry & Lugar, 2010). The StartUp Visa Act would therefore enable successful entrepreneurs to legally reside in the United States. While we can discuss how the ideas described above can be improved, we cannot ignore that there is a need for improvement, and foreign skilled workers and entrepreneurs can help us achieve this goal. First, given the fact that the current U.S. immigration system does not have a specific Visa for entrepreneurs and considering the beneficial effects of entrepreneurship in this country, I would suggest the creation of a Visa for entrepreneurs. Also, I would suggest incrementing the number of Green Cards available each year for foreign workers and for investors. As I mentioned before, in 2009 only 0.3 percent of the total number of Green Cards went to investors and on average only 5-10 percent of the applicants in this category are entrepreneurs. Among companies who use H-1B Visas9, nearly 40 percent said the lack of H-1B Visas has “negatively impacted [their] company when competing against other firms globally” (Anderson & Platzer, 2006, p. 7).

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The H-1B is a non-immigrant visa in the United States that allows U.S. employers to temporarily employ foreign workers in specialty occupations ("H-1B visa").

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS Conclusion

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In this paper I described the current U.S. immigration policy with a particular focus on how the current system can be improved in order to attract more skilled workers and entrepreneurs. The general purpose of an immigration policy should be to maximize the positive effects that this phenomenon can bring to a country, and in order to achieve this objective we should address each group of immigrants separately, by using a different set of norms for each one of them. Improvements on immigration policies that affect skilled workers and entrepreneurs can have a tremendous effect on the economy and on society. Indeed, research clearly shows the positive effects that immigrants, and especially skilled immigrants, have on the country. Given the empirical evidence and the arguments I made in this paper, I believe that in order to design a smarter immigration policy, some actions should be completed before making decisions. First, experts should make realistic predictions regarding the demand of Green Cards in the coming years, and this is why in the first part of my paper I introduced the issue in general terms. Second, they should try to estimate the benefits and the costs that the different categories of immigrants have on the economy and on society and only then, based on the results, design specific policies for each category. In the case of foreign skilled immigrants and entrepreneurs, my research suggests that it is more efficient to think in terms John S. Mill’s libertarianism, while we can address the general immigration regulations from a utilitarian prospective.

Designing a policy that inspires the best brains from around the world to come to the U.S. and create wealth requires an easy and certain immigration process. In addition, the U.S. should consider introducing a specific Visa that targets foreign entrepreneurs since, as I previously stated, the current regulation does not have one. An immigration policy that allows demand and

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS supply of talented individuals to naturally adjust to the needs of the economy would be more efficient and valuable for this country.

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Also, we need to acknowledge that however we decide to allocate Visas and Green Cards, we are discriminating. The current system seems to discriminate against those who do not have relatives in the U.S., while a smarter immigration system would, in my opinion, reward more those who can create wealth in this country.

In discussing my argument, my primary focus was on efficiency and the resulting conflict between experts and markets. Even though politicians are the ones who make decisions on immigration policy, as I explained earlier, they are usually advised by experts and they have to respond to their voters’ needs. Therefore politics was a secondary issue in my paper. Finally, further research should be conducted in order to determine the most effective ways to attract skilled workers and entrepreneurs from around the world.

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS References

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"H-1B visa". (n.d.). Retrieved November 4, 2010, from Wikipedia: http://en.wikipedia.org/wiki/H-1B_visa "Permanent residence (United States)". (n.d.). Retrieved November 2, 2010, from Wikipedia: http://en.wikipedia.org/wiki/Permanent_residence_(United_States) Anderson, S., & Platzer, M. (2006). American made: the impact of immigrant entrepreneurs and professionals on U.S. competitiveness. Retrieved October 30, 2010, from http://www.nvca.org/index.php?option=com_docman&task=doc_download&gid=331&It emid=93 Bodvarsson, O. B., & Van den Berg, H. (2009). The economics of immigration. Retrieved September 29, 2010, from http://lib.myilibrary.com?ID=228798 Borjas, G. J. (Ed.). (2000). Issues in the economics of immigration. Chicago, IL: The University of Chicago Press. Dalziel, M. (2008). Immigrants as extraordinarily successful entrepreneurs: a pilot study of the Canadian experience. Journal of Small Business and Entrepreneurship , 21 (1), 23-36. Friedman, T. L. (2010, April 3). Start-ups, not bailouts. Retrieved October 30, 2010, from The New York Times: http://www.nytimes.com/2010/04/04/opinion/04friedman.html Kane, T. (2010). The importance of startups. Ewing Marion Kauffman Foundation. Kerry, J. F., & Lugar, R. G. (2010, February 24). Bring opportunity, investment, and jobs to America co-sponsor the StartUp Visa Act. Retrieved November 1, 2010, from StartUp Visa: http://startupvisa.files.wordpress.com/2010/02/dc-startup-visa-act-2-24-10.pdf

HOW ATTRACTING MORE FOREIGN SKILLED WORKERS Legrain, P. (2007). Immigrants: your country needs them. Princeton, NJ: Princeton University Press. Mill, J. S. (1859). On liberty. (S. Collini, Ed.) Cambridge: Cambridge University Press. Monger, R. (2010). U.S. legal permanent residents: 2009. Washington, DC: Department of Homeland Security, Office of Immigration Statistics.

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Ottaviano, G., & Peri, G. (2005). Cities and cultures. Journal of Urban Economics , 58(2), 304337. Scott, H. R. (2009). The use of credit card debt by new firms. Kansas City, MO: The Ewing Marion Kauffman Foundation. U.S. Department of Homeland Security. (2010). 2009 Yearbook of immigration statistics. Washington, DC: U.S. Department of Homeland Security, Office of Immigration Statistics. U.S. Small Business Administration, Office of Advocacy. (2010, September). Global entrepreneurship and the United States. Retrieved October 30, 2010, from http://www.sba.gov/advo/research/rs370tot.pdf USCIS. (2009). Green Card. Retrieved November 2, 2010, from U.S. Citizenship and Immigration Services: www.uscis.gov/greencard Wadhwa, V., Saxenian, A., Rissing, B., & Gereffi, G. (2008). Skilled migration and economic growth. Journal of Applied Research In Economic Development , 5 (1), 6-14. (2009). World population prospects: the 2008 revision. New York: United Nations.

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