More Data on the Age Issue, Plus Clarification on H-1B Underpayment

As most of you know, I often point out that employers use the H-1B work visa program in order to hire young foreign workers in lieu of U.S. citizens and permanent residents over age 35.  Younger workers are cheaper, as a recent PayScale report illustrates.  (Note that older workers are more costly in terms of health benefits and the like as well.)  Though the analysis simply looks at college major, regardless of whether the person is still working in that field, the numbers (adjusted for inflation) are comparable to the report that I wrote at the invitation of the California Labor & Employment Law Review, a California State Bar publication.  Basically, the magnitude of  wage savings accruing from hiring the young is about 40%.

So you can see why the employers concentrate on the young H-1Bs, and for that matter new or recent grads in general.  Concerning the latter, see my recent blog post, “A Failed Recruitment,” particularly the material quoting Intel.

Which brings me to a point I’ve been meaning to make for a while.  I’ve always referred to what I call Types I and II wage savings accrued by hiring H-1Bs.  The former involves paying H-1Bs less than what comparable Americans make (the word comparable is key), while Type II arises from hiring young foreign workers instead of older Americans.  My Migration Letters paper estimated the Type I savings at something like 20%, and this is what I wish to clarify.

That 20% figure was based on a technique I like to use:  Take the industry’s claims at face value, and see where that leads.  I took that approach in my EPI paper on the technical quality of the H-1Bs, and used this technique in a different context in Migration Letters, concerning the wage savings issue.  In this latter case, I reasoned as follows:

• The legally required wage for H-1Bs, called the prevailing wage, does not take into account special skills, say Android programming.  Yet the data show that most of the foreign tech workers are paid at or near the prevailing wage.
• The employers claim that they hire H-1Bs because the foreign workers possess special skills that are rare among Americans.
• The special skills typically command a premium of 20% or more on the open market.
• Therefore, the Type I savings is about 20%.

What is often overlooked — including in my own statements, I must admit — is that the above analysis is predicated on the employers’ claims that they hire H-1Bs because qualified Americans are not available.  In reality, though, many employers are motivated not by Type I savings but by Type II.  And it’s no wonder, since the latter savings are much larger.  My point, then, is that even if an employer pays his young new grad H-1Bs the same as similar Americans, he is still saving something like 40% in the Type II sense.

In other words, if one drops the assumption that the employers are telling the truth 🙂 the overall Type I savings might be somewhat lower than 20%.  I say “somewhat,” because one must also note that most analyses, including mine above, are based on wage at the time of hire.  The NRC survey found that employers admitted to giving the H-1Bs smaller raises and so on, so there is a counter factor, making the 20% figure (or its adjusted version) actually too low.

To my knowledge, my papers are the only ones to take skill sets into account, even in the indirect manner described above.  Clearly, it is a key factor and cannot be ignored.

So, as is often the case with economic issues, we do not have a firm estimate of the magnitude of Type I savings.  But as I state in the Migration Letters article, the question of whether such savings exist should be considered settled, just from applying basic principles:

• Immobile workers make less than mobile ones, all else being equal.
• The H-1Bs who are sponsored for green cards (i.e. tech industry mainstream, e.g. Intel, Google etc.) are immobile.
• Thus the mainstream H-1Bs are underpaid, compared to the market value they’d have if they were American.
• In addition, the foreign workers tend to be willing to work for less, as a green card serves as large nonmonetary compensation for them.

So, again, the use of the H-1B program by employers to save labor costs ought to be considered a settled question.

In an upcoming post, I’ll present a “cookie theory” analysis of computer industry wage trends.  Stay tuned!