Do guest worker programs give firms too much power?

Guest workers win: Individuals benefit

Guest worker programs offer workers in developing countries unparalleled opportunities to increase their earnings by working abroad and are thus popular, with intense competition among prospective migrants for a limited number of spots. Survey evidence finds that Indian construction workers have favorable views of wages and working conditions for guest workers in the UAE [1]. Even though they have little bargaining power and are underpaid compared to Emirati nationals, guest workers who go to the UAE are more likely to recruit family members for the same opportunity, and earn more compared to Indian nationals who remain in India [1].

As an indication of the popularity of these programs, the number of workers admitted to the US in visa programs requiring employer sponsorship has more than quadrupled in the 30 years since 1989, growing from 216,863 admissions in 1989 to 962,517 in 2019, according to the US State Department. In the US high-skill H-1B program, the use of random lotteries to assign visas, and variations in quota policy, has provided a basis for many researchers to examine program effects. The number of applicants for H-1B visas regularly exceeds the number of visas available (fixed at 65,000 visas for private employers since 2004). To handle such applicant surplus, individual applications for visas are entered into a randomized lottery [2]. Such random assignment has led to high-quality natural experiments that can help determine the effects of these programs on guest and existing workers, and firms.

Firms win: Competitive advantage

In guest worker programs, firms select migrants in an origin country and determine who is authorized to lawfully work in a destination country. Firms can thus access a global supply of labor, and in the absence of regulations, profit from the difference between the wage at which a migrant worker is willing to work and the going wage rate for labor in a destination country. Guest worker programs often target specific labor markets that face annual seasonal worker shortages, such as agriculture and hospitality, as well as professional occupations such as medical and information technology professionals where firms require highly specialized workers. Insufficient worker availability in critical roles can have serious negative consequences for firms; having a globally mobile workforce thus carries many advantages.

For firms that operate in industries where a scientific and engineering workforce is important, highly-skilled workers provide a competitive advantage. A study using the lotteries of H-1B visas shows that firms facing shortages of guest workers had reduced employment, sales, and profits [2]. Firms unable to hire guest workers due to visa rationing also had reduced market value, R&D investments, and capital expenditures relative to firms that did not face visa rationing. Firms that are heavier users of the visa reported a smaller negative impact due to visa rationing than less intensive users, as heavy users must have a backup plan for the possibility that they will face a shortfall of guest workers [2]. With access to guest workers, firms have a pool of labor that otherwise would not be available, and can more rapidly grow and expand their operations. In matched employer–employee data, overall employment of skilled workers, including existing workers, increases inside a firm as more skilled guest workers are employed [3].

Nations win: Meeting labor needs, attracting talent

The policy goals of guest worker programs often include providing the destination country with a competitive advantage in the global economy through an adequate labor supply in critical occupations and industries. High-skill guest worker programs can help nations attract the “best and the brightest” of global talent. There is evidence that firms often want to keep the best high-skilled workers in the destination country during economic downturns, not the cheapest [4]. Guest workers are often just as essential to nations in other contexts: as an extreme example, guest workers make up 90% of the private workforce in the UAE, working primarily as domestic laborers and in the construction industry [5]. In a world without guest workers, many nations might see their fruits and vegetables rot in the field, seasonal tourist industries collapse, and construction work grind to a halt.

As countries age and experience severe labor shortages, guest worker policies have been explored as a way to meet labor needs and could be designed to help nations meet fiscal obligations for an aging population. Because visa fees typically cover the costs of administering these programs, and firms pay the costs of recruitment and round-trip travel, taxpayers are sheltered from the costs of running a guest worker program. During business cycle downturns, firms typically cannot stop paying a guest worker, or rely on the social welfare system, and must instead pay for idle time or for the costs of repatriation. Tax treaties and policies shape the fiscal impact of guest worker programs, but such programs are likely to have a positive fiscal impact if they require guest workers to pay for government services and benefit programs that they are then unable to access. Such inequities do raise ethical concerns; economists often respond that regardless of such inequities, there is evidence that guest workers still benefit from working abroad and are better off as a result [1].

While most programs ban guest workers from citizenship entirely, some guest workers on temporary visas eventually immigrate to a destination country and become citizens. Immigrants who first arrived in the US on a temporary work visa or student trainee visa have been shown to patent, publish, earn, and found companies at higher rates than native-born workers, while immigrants who arrive with permanent residence (and have never been guest workers) do not [6]. Temporary work visa holders who immigrate to the US also out-earn existing US workers and immigrants who arrive on student trainee visas [6]. This is likely because firms are better than nations at selecting talented individuals, often by relying on educational credentials and observed productivity. Skilled guest worker programs with firm sponsorship are also argued to be especially effective at increasing productivity growth in the long term. As one study concludes, “within this complex system, firms, universities and teaching hospitals are the most successful in attracting and selecting immigrants engaged in activities likely to increase US total factor productivity” [6], p. 445.

There is evidence that benefits of guest worker programs spill over to existing workers, and that host nations would be worse off in a world with less regulated migration. As firms in the US hire more highly-skilled guest workers, who must have at least a college degree and often work in Science, Technology, Engineering, and Mathematics (STEM) occupations, nearby existing workers experience wage gains and no loss in employment [7]. A 1% increase in the number of foreign-born guest workers in STEM fields was found to increase college-educated wages of existing workers by 7%–8% and non-college educated workers’ wages by 3%–4% [7]. In a world of global trade in goods and services without global labor mobility, firms also have the option to move operations abroad if they cannot bring workers to a host country. US-based multinational firms that are unable to hire H-1B workers due to visa rationing increase investments in offshore facilities and hiring, particularly in Canada, India, and China [8]. In the absence of regulated guest worker programs, irregular migration and non-existent or lower labor standards might take the place of lawful temporary migration, harming both existing and migrant workers.

Exploitation and abuse

National regulations typically require firms to assume responsibility for workers they sponsor and to meet high labor standards. However, weak enforcement and rules that actually or effectively tie guest workers to their employers can lead to exploitation and abuse. Incidents of labor abuses including indentured servitude and forced labor occurring under guest worker programs are routinely documented by advocacy organizations such as Human Rights Watch and by the US State Department. Cases of fraud and deception in recruitment, and discrimination and inequitable wages compared to existing workers, have also been reported in ILO publications. High labor standards in the form of prevailing wage requirements should limit employers’ ability to exercise such power. However, employers may be willing to break the law if there is little enforcement, if punishments are weak, and if the gains from cheating are especially large.

In some countries, such as Australia, Norway, and Russia, a guest worker is barred from switching employers. In the US, employees on certain visas such as the L-1 for intracompany transfers may not change employers. Many programs allow employees to switch employers, but only through a costly and burdensome visa transfer process. For firms wishing to hire a guest worker already in the US, administrative costs in the H-1B program add an additional $2,301–$6,301 to hiring costs, depending upon firm size [9]. Critics have argued that these programs specifically create conditions of indentured servitude [4]. However, an analysis of H-1B guest workers finds that there is substantial job-to-job mobility among workers at large employers of information technology workers in the US: 20% of such workers quit and remain in the US with a new employer [4]. Separate studies have found that guest workers on H-1B visas can change jobs at similar rates to existing workers, but when they apply for permanent residence (a step that requires employer sponsorship from a single firm), mobility declines significantly. While waiting for permanent residence to be granted, a process that can take up to ten years, a worker who quits their sponsoring employer would lose their place in the waiting line and have to start a new application with a new employer. Estimates of the wage effect of receiving permanent residence differ, and high-skilled guest workers may not receive a large pay increase when their status becomes permanent.

The guest worker system in the Arab states has had numerous reported abuses, including theft of workers’ passports and conditions of indentured servitude. UAE regulations tie workers to one employer for the duration of a two-year contract. Reforms implemented in 2011 permitted a worker to change employers after the completion of their contract, without obtaining approval from their prior employer. This reform increased guest workers’ real wages by over 10% [5]. Migrant workers already in the UAE were more likely to stay in the UAE and less likely to quit their employment at the end of the contract. As higher wages retained migrant workers, and reduced the need to recruit more migrant workers, the number of new entrants to the UAE fell, and newer arrivals were paid lower wages [5].

Monopsonistic labor markets

Economists have scrutinized guest worker programs as sources of potential monopsony power, or the power to set wages below competitive levels [10]. In comparison to a competitive labor market, in which firms are unable to recruit with wages below the market rate and where workers quit bad employers, workers in a monopsonistic labor market have difficulty quitting for better opportunities. Job-to-job mobility is impeded when an employer must pay to sponsor a visa for a worker to change jobs [4]. It is also likely that some employers in the destination country discriminate against guest workers and will only hire them at lower wages or will not hire them at all, thereby reducing competition and increasing firm power. Another reason to suspect monopsony power is the concentration of employers in the market for guest workers: several studies show that large firms and labor market intermediaries employ a disproportionate share of guest workers [9], [11]. In the US high-skilled guest worker program, payroll data from large employers of Indian guest workers suggests firms have the power to pay workers approximately 37% below their worth to the firm, a significant departure from what firms would pay in a competitive market [4].

Exceptional financial returns to migration due to a worker changing location create large incentives for firms if they can control the migration opportunity. When a monopsony model of migration is used, firms reap many of the rents involved in guest worker programs. Both existing and migrant workers may suffer lower wages as a consequence of firm power over migrant workers in the absence of labor market institutions [10]. High prevailing wage regulations and other policies that constrain firms’ ability to use their monopsony power can counteract negative effects and retain the positive program aspects [10]. Indeed, evidence supports the view that while firms have the power to pay workers below competitive levels in the US visa programs for seasonal, agricultural, and high-skilled workers, regulations largely block them from doing so [9]. Limiting immigration could be self-defeating as migration has the potential to increase the total income gains of existing workers under a system that limits firms’ ability to use their monopsony power [10].

The policy of setting quotas on visas may drive smaller firms away from direct recruitment of foreign workers, and instead reward larger firms and intermediaries that can specialize in managing the complex process of hiring guest workers [11]. While requiring firms to sponsor and pay the additional costs involved in hiring guest workers may protect taxpayers by putting the cost on employers, this limits the number of employers who will hire guest workers. The limited number of employers engaged in sponsoring guest workers, in turn, can reduce wages. In the H-1B program, firms facing no competitors in a labor market set wages approximately 13% below what firms in a market with many competitors would pay [9].

Firm and national strategy misalignment

When nations permit firms to sponsor workers, firm-level strategies select the migrant population, and contribute to the effects of migration in a receiving country. Firms may lobby destination country governments to seek additional visas or lighter regulations, distorting the aims and operations of the programs. Many large users of guest worker programs are international labor market intermediaries that serve as brokers between demand in destination countries and supply in sending countries. Firms that are heavy sponsors of H-1B guest workers patent less and earn higher revenue per employee, contrary to program goals [12]. Moreover, firms in particular industries may not align with program objectives. While the semiconductor industry and universities show correlation between sponsoring H-1B guest workers and increased patenting and R&D investment, software companies and hardware companies do not [12].

While studies highlighted earlier emphasize positive results from the H-1B program, within-firm estimates of the effect of firm sponsorship of H-1B visa guest workers that are matched with federal tax records suggest otherwise. An important study finds sponsoring H-1B workers had no effect on use of the research and development tax credit or patenting [13]. The same study shows firms had higher profits, lower average employee earnings, and that higher overall employment was mitigated by evidence of guest workers crowding out existing workers [13]. Addressing a concern that guest workers replace older workers, another study finds that while overall employment increased as firms sponsored more H-1B workers, older workers’ employment levels increased less than younger workers’, and there is mixed evidence regarding the effects of guest workers on the absolute level of older workers’ employment [3].

Distorting labor markets in sending countries

When firms have the power to screen and select incoming migrants, firms hold power over aspiring migrants in sending countries. Given the potential to earn higher wages in a destination country, aspiring migrants may become tied to firms in their origin nation in the hopes of traveling abroad. For example, under the US L-1 visa for intracompany transfers, a worker must be employed abroad continuously by their sponsor for at least one year prior to sponsorship. A promise of a much greater reward later in the destination country can be used to exploit aspiring migrants and require them to pay recruitment fees, kickbacks, or bribes, or acquire debt as a means to travel abroad. The ILO's Fair Recruitment Initiative seeks to end the worst abuses globally, and in reporting on 90 national policies and 18 bilateral agreements on recruitment fees and related costs available in 2020, the ILO highlights that 63 countries ban charging workers recruitment fees and related costs, while 36 regulate fees.