How an Uncertain US Immigration Policy Affects Labour Markets

In the last decade, increased anti-immigration rhetoric has resulted in a massive rise in migration policy uncertainty across advanced nations like the United States, United Kingdom, France, and Germany.

The debate surrounding immigrant workers has traditionally centred on low-skilled labour. However, during the months leading up to the election of President Trump and his tenure, immigration policy uncertainty expanded to encompass skilled workers as well. The US H-1B visa programme – a temporary high-skill work visa targeting professionals with at least a US-equivalent bachelor’s degree – became a particularly contentious issue throughout Trump’s first presidential campaign. During and after his first Republican primary victory in June 2016, Trump increasingly emphasised his commitment to curbing what he termed “H-1B visa abuse”, repeatedly arguing that foreign workers were displacing American employees at lower wages. While the actual visa quotas and procedural mechanisms remained unchanged between mid-2016 and March 2017, the period witnessed an unprecedented spike in migration policy uncertainty (Figure 1) – rising to three times its previous level – a surge unparalleled in any previous election year.

Figure 1. Migration policy uncertainty

This uncertainty around H-1B immigration policy can affect demand for foreign workers in both the host and sending countries. Economic theory suggests that heightened uncertainty prompts firms to delay investment decisions (Bernanke 1983, Dixit and Pindyck 1994). This delay allows firms to wait for more clarity about future policy changes before committing resources. In the specific context of H-1B hiring, escalating policy uncertainty can create significant hesitation among companies considering international talent for US-based positions. The cost of acquiring H-1B visas makes hiring a high-stakes decision – the complex visa application process requires considerable resources, including legal fees, administrative time, and potential relocation expenses – increasing the option value of waiting. When the regulatory landscape appears volatile, firms can also explore alternative talent acquisition strategies. For instance, firms in the sending country may increase the hiring of workers who would have been hired in the US (host country) absent the uncertainty in H-1B visas. In our recent study (Chaurey, Mahajan and Tomar 2024), we examine this question using data from India’s leading job platform for skilled workers from 2014 to 2017. The H-1B programme is especially relevant for Indian workers, who account for a staggering 70% of these visas.

Effect of US immigration policy uncertainty

We look at the impact of the heightened uncertainty around H-1B immigration policy on the demand for India-based workers by firms in both the US and India. We find that job postings for US-based positions on the platform plummeted by 15% immediately after President Trump’s first primary win (Figure 2).

Figure 2. Impact on postings for US-based jobs

This fall could be due to two reasons – increased hiring of local workers in the US or increasing hiring for India-based positions by firms who would have otherwise hired these workers in the US. To test this, we first construct a measure of firm’s H-1B dependence using the share of their total vacancies which were US-based on the platform before June 2016. This captures the extent to which firms were affected by the uncertainty. Using this measure, we find that the uncertainty drove firms with a higher H-1B dependence to increase their India-based postings (Figure 3). Our empirical results show that for every 10 percentage point increase in a firm’s H-1B visa dependence, there was an 11% rise in India-based job postings. Specifically, a one standard deviation¹ increase in uncertainty led to a 5.3% increase in India-based postings for firms with a 10-percentage point higher proportion of US-based vacancies. To contextualise these findings, consider an average firm having 20.9 US-based vacancies.

Figure 3. Impact on postings for India-based jobs

Notes: (i) The figure plots the quarterly coefficients showing the impact on postings for India-based positions based on firms’ exposure to the shock (share of US based vacancies of all firm vacancies before June 2016). (ii) The vertical line corresponds to Trump’s win in the Republican primary in June 2016.

What explains the increased demand for workers in India?

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To investigate whether firms were creating new positions or relocating existing ones, we analysed both job postings and firms’ balance sheet data. We find that occupations more suitable to offshoring showed larger increases in India-based job postings. Several pieces of evidence support that this represents offshoring rather than market expansion: first, service exports rose significantly, increasing 4% for every 10 percentage point rise in H-1B dependence for these firms. Second, job postings in other countries remained unchanged during this period of heightened uncertainty. Third, domestic sales in India showed no change, indicating these firms were not expanding operations to serve in the sending country. The pattern was particularly pronounced among Indian-headquartered firms, which were twice as likely as their US-headquartered counterparts to increase India-based positions when faced with the same H-1B-related pressures. These findings collectively suggest that firms responded to H-1B visa uncertainty by relocating positions to India rather than creating entirely new roles.

Policy implications

Our research advances understanding of immigration and offshoring dynamics. Instead of fostering domestic employment, heightened uncertainty in the US led to job relocations to the sending country. Importantly, policy uncertainty significantly impacted hiring decisions before actual policy changes occurred. The uncertainty following Trump’s primary win influenced firms’ hiring patterns in both host and sending countries, despite no changes to visa quotas. This demonstrates how firms preemptively adjust to potential policy shifts, particularly for contentious issues like immigration. The magnitude of the effect of uncertainty is noteworthy – approximately two-thirds that of the actual 2017 Trump administration policy changes. This highlights the importance of addressing policy uncertainty proactively to ensure minimum disruptions to interconnected global labour markets. These findings take on renewed significance as President Trump returns to office, reigniting intense debate over H-1B visa policies. Overall, our findings show that protectionist measures intended to benefit domestic workers can backfire, as firms may respond by relocating jobs overseas.

Notes:

1. Standard deviation is a measure used to quantify the amount of variation or dispersion of a set of values from the mean (average) value of that set.

Ritam Chaurey, Assistant Professor of International Economics at Johns Hopkins SAIS.

Kanika Mahajan, Assistant Professor at Ashoka University

Shekhar Tomar, Assistant Professor in the Economics and Public Policy Area at the Indian School of Business. 

This article has been republished from Ideas For India under Creative Commons.