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Dr. Norm Matloff Goes To A Labor Market Conference
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July 19, 2011, 05:00 AM
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Dr. Norm Matloff writes to his e-newsletter mailing list

I was in DC this past Monday, July 11–very briefly, as usual–for a one-day workshop held at Georgetown University, sponsored by the Sloan Foundation. I’ll omit the rather uninformative title, and instead give you the blurb:

The purpose of this workshop is to review projections of the demand for and supply of science and engineering (S&E) workers, regulations governing the admission of foreign S&E workers and employers, and hiring patterns in S&E labor markets. The workshop will discuss how projections are made and evaluated; current OPT, H-1B and PERM regulations and proposed changes; S&E employer hiring patterns and S&E worker experience over the business cycle. We plan another workshop on the impacts of foreign S&E students and workers.

The attendees (by invitation only) could be described as the Who’s Who of DC policymakers related to the above issues. While I won’t name them individually (no, they weren’t wearing bags over their heads, but I’ll keep them anonymous for reasons given below), I’ll state that they were from agencies such as the Department of Homeland Security, the National Science Foundation, the Government Accountability Office, the Congressional Research Service and the “shadow-governmental” National Research Council/National Academy of Sciences. There were also several of us from academia, as well as several professional advocates–one from organized labor, one from the business community who specializes in matters such as H-1B, and one from a think tank allied with the immigration lawyers. There was even a student intern who is working with a presidential council on STEM (science, technology, engineering, mathematics) matters.

The workshop was conducted under Chatham House Rules, meaning that one may report what was said but not who said it. And I’m going to err on the side of being a bit more circumspect than I probably need to be under those rules, by not listing the names of the participants. Otherwise some cognoscenti readers of this e-newsletter might be able to deduce the identities of those who made statements I mention here.

(On the other hand, several longtime readers were present at the workshop, and a couple of new ones. I’ve also cc-ed one of the organizers. So if I misreport something, please let me know, and I will post a correction, again without attribution.)

I have posted an updated version of the full paper I wrote for the workshop here.

The topic of my presentation concerned the fact that, contrary to current “conventional wisdom” in DC, use of H-1B and employer-sponsored green cards for reduction of labor costs (read “cheap labor”) is commonplace among mainstream U.S. firms; it is NOT only a problem among the Indian-owned bodyshops. I’ve written quite a bit here about this misperception in DC, but I must admit that even I was surprised on Monday as to how solidly entrenched this thinking is among policymakers. Much of my posting here will thus cover this point, but there are other issues well worth mentioning, which I will do first.

Perhaps most remarkable was the discussion of “diverted” STEM grads, an odd term meaning the workers who wind up in careers that do not make hands-on use of their STEM education. Quite contrary to the constant claims made by the industry lobbyists that insufficiently many American students major in STEM fields in college, an extensively-researched 2007 Urban Institute report showed that in fact we are producing more STEM graduates than there are job openings in the field. This had been known in various senses previously, but the Urban Institute report really attracted attention. You can read my reviews of the study here and here.

The “diverted” STEM graduates sometimes go into jobs in which their education has some value, though not directly applied, such as a molecular biology grad doing analysis of biotech stocks for a mutual fund. Or they might end up in jobs totally unrelated to their STEM education.

One of the speakers made a highly provocative remark on the “diverted” graduates. Referring to the fact that one can make a lot more money by going into non-STEM careers (law, MBA, financial industry, etc.) if one has excellent analytical skills, the speaker said, “If you’re good at math, you’d be crazy to go into a STEM career.”

All the policymakers present understood, and none challenged him on the point. But several saw no problem in it. One even said that the “diverted” STEM grads don’t care whether they are in jobs that make direct use, or even any use at all, of STEM. A job is a job, under this viewpoint.

I was quite taken aback by such remarks. True, there are some STEM students who are not enthusiastic about their fields; many engineering students are in the major only due to parental pressure and the like. Yet it should be obvious that the people who really contribute–the ones we want to make use of their training–are passionate about their work; they do NOT feel that “a job is a job.” To whatever degree these people are diverted (and I know many examples, apparently including one of the workshop participants on Monday), we–our nation and even the world–lose.

I asked the speaker who made the “you’d have to be crazy” remark if the gap in salaries between, say, MBAs and physics researchers, was in part due to the H-1B and green card programs flooding the market. He flatly denied it. Since it’s an obvious fact, recognized by the NSF, NRC etc. (see below) but obvious even without formal explanation, his denial was interesting. I’m not sure how he was viewing it.

During my talk, I brought up the late 80s NSF internal report that said, in essence,

STEM PhD salaries are too high, so let’s bring in a lot of foreign students to flood the market and keep wages down. By the way, the resulting stagnant salaries will drive the American students away from STEM into law and MBA programs.

(I’ve paraphrased here, and will bring in the exact wording below.) I commented, “Well, there are some NSFers here, so it will be interesting to see how they view this.” Indeed, one of them, whom I’ve known a bit for years, protested that the report hadn’t actually said that, and that it wasn’t the “smoking gun” that people had portrayed it to be. At that point, another participant, who knows the history of the NSF statement in more detail than I, interjected, “I can respond to that.” He then explained that there were several reports, and that the one this NSFer had seen was not the inflammatory one; another of the reports did in fact express the opinions I’ve summarized above.

For those of you who haven’t seen this yet (even if you have, I’m quoting more extensively here than I have before), I’ll quote the exact phrasing below. It will be important to other remarks I make later.

[Thus, to] the extent that increases in foreign student enrollments in doctoral programs decline or turn negative for reasons other than state or national policies it may be in the national interest to actively encourage foreign students. One way to do this is to ensure that foreign students have equal access to graduate student support funds provided through federal agencies. Another approach is to grant permanent resident status or immigrant status to foreign students successfully completing PhD degrees at U.S. institutions…

A growing influx of foreign PhDs into U.S. labor markets will hold down the level of PhD salaries…[The Americans] will select alternative career paths…by choosing to acquire a “professional” degree in business or law, or by switching into management as rapidly as possible after gaining employment in private industry…[as] the effective premium for acquiring a PhD may actually be negative.

(Taken from Eric Weinstein, How and Why Government, Universities, and Industry Create Domestic Labor Shortages of Scientists and High-Tech Workers, NBER, 1998, available at )

One of the academics there, who jokingly described himself as “a member of the Economic Right,” said that he was sure that the tech industry’s fondness of the H-1B visa is motivated by a desire for cheap labor. However, he said that that was fine with him, as it resulted in cheaper tech goods for consumers. I questioned whether software labor costs contribute much to the retail price of, say Microsoft Office, but in any case, there is a fundamental question as to whether we want to see our “good” jobs fall victim to this.

One of the participants from the NSF expressed the opinion that having a large number of foreign students (and by extension, having liberal H-1B and green card programs, which draw the foreign students here) is good, because it enables a lot of “third tier universities” to keep their doctoral programs afloat. This is counter to the well-established fact that we are producing too many PhDs (whether foreign or domestic), and certainly at odds with the industry lobbyists’ claim that the foreign students are all “the best and the brightest.”

Now, let’s return to the issue of the Indian-owned bodyshops, which I’ll refer to as IBs for brevity. As I mentioned earlier, my own presentation showed that the mainstream U.S. firms use H-1Bs for cheap labor too. The mainstream companies do tend to hire a higher class of workers, but still they are paying the H-1Bs less than they would pay Americans (U.S. citizens and permanent residents) of similar quality. Here’s a summary of one of my analyses:

I first showed why gaping loopholes in the legal prevailing wage–the minimum legal pay for H-1Bs and green card sponsorees–is 15% or more below true market rate (considerably more if age is accounted for). I pointed out that the fact that the legal prevailing wage is lower than the true market wage this had also been found before by the GAO, etc. I then presented green card data showing that at least half of the sponsorees were being paid only the prevailing wage. Since research of others has shown that almost none of the green card sponsors are IBs, that implies that at least half of the non-IB, i.e. mainstream firm, foreign workers are being paid below-market wages. I also presented other statistics showing this.

Though it never explicitly says so, the recently-introduced Lofgren IDEA Act is very much focused on the IBs. I mentioned this in the workshop, only to find that everyone already seemed to be aware of it. Indeed, they seemed to understand that this was in fact the point of the Lofgren bill.

There turned out to be a lively discussion of the role of the IBs in H-1B reform at the end of the day. The workshop lasted a full day (plus an evening dinner, very enjoyable). At the end, the three organizers gave summaries. Two of them highlighted the issue of the IBs, stating that this was a priority issue in reform of H-1B. And I believe I’m correct in stating that one of those two organizers regarded the IBs as THE issue for reform.

Various other speakers and participants had made similar statements during the day. One of them, another academic, was quite surprised when I mentioned to him during a break (and before my talk) that the mainstream U.S. firms use H-1B for cheap labor too, i.e. that it is wrong to view the IBs as the main abusers of the program. His surprise illustrated just how much this view is taken for granted in DC and related circles.

One of the summarizers mentioned that the people who had written the H-1B statute had never anticipated that H-1B would be used by the IBs. I asked him, though, what’s so bad about that? Why is it OK for Intel, say, to hire an H-1B directly, but not OK for Intel to rent an H-1B from Infosys, a large IB?

A number of people had ready answers to this, and spoke up immediatley in response to my question. Their reasons why reform legislation should focus on IBs included: the IBs (especially the small mom-and-pop outfits) have a higher than average rate of violating H-1B law; they are involved in using H-1Bs for offshoring; it’s harder to monitor the H-1Bs who work for the IBs, since they are essentially working for two employers; the IB business model specializes in providing cut-rate workers; and the IB business model does not follow a desirable “social net” (presumably meaning workers who will establish roots in the U.S.).

One can debate the merits of those and other issues involving IBs, but that doesn’t mean that one should craft legislation that focuses almost exclusively on the IBs (as the recently introduced Lofgren bill does). If my findings that the U.S. mainframe firms are also using the H-1B program for cheap labor are valid, why should it matter that the U.S. firms are underpaying foreign workers with U.S. Master’s degrees while the IBs are underpaying foreign workers with Indian Bachelor’s degrees? The bottom line remains that American workers with U.S. Master’s degrees have having their wages and job opportunities undercut by the H-1B program.

So, why the disconnect? Why are the policymakers satisfied to only go after the IBs? Undoubtedly, part of it stems from the adage, “politics is the art of the possible.” The IBs do have influence in Congress, but it pales in comparison to the clout of the big mainstream U.S. firms. It’s easier to clip the wings of the Infosyses than the Intels (though even under the Lofgren bill, the Infosyses would still be able to operate pretty much as before; see here).

But it’s more than that. I’ve been writing about this subject since around 1994, and I’ve observed that many people support H-1B out of an admiration for the tech industry. One researcher at the workshop mentioned Google several times, saying something along the lines of, “We need to reform H-1B in a manner that keeps the Googles.” While his choice of example is misguided–Sergey Brin came to the U.S. as a family immigrant at age 6, not as an H-1B or foreign student, and the idea for Google’s PageRank search algorithm came from U.S.-born Larry Page, not Brin–it’s clear what he meant: Yes, the mainstream U.S. firms want cheap labor too, but we can forgive that because they also hire foreign geniuses, the reasoning goes.

I have always supported facilitating the immigration of “the best and the brightest,” but very few of the H-1Bs are in the league, as I show in a paper that is (hopefully) coming out soon; by almost any measure, the H-1Bs, including those with U.S. degrees, are similar to the Americans. Meanwhile, as information above shows (especially the NSF document), and the “you’d have to be crazy” remark so colorfully expresses, the H-1B and employer-sponsored green cards programs are resulting in an internal brain drain in the U.S., with stagnant wages driving bright U.S. kids away from STEM.

I pointed out in the workshop that American creativity is our only comparative advantage. The rest of the world is just as smart as we are, and they work just as hard. Even the much-vaunted American research university system is not really better than the best in other countries (even if our research quantity is higher). But our culture does produce more innovative people, and we are importing workers from countries whose governments fret their people are insufficiently creative. Thus the internal brain represents a net loss to us.

It’s noteworthy that the NSF document, written more than 20 years ago, not only forecast correctly that the suppression of salaries would drive out the Americans, but also suggested luring the foreign students with automatic green cards. The latter proposal, of course, is quite popular in DC circles today, and is a feature of the Lofgren bill. Yet the NSF’s reasoning shows exactly why this is not a good idea.

The H-1Bs employed by the IBs account for only 12% of all the H-1Bs, according to the Washington Post. That’s a substantial chunk, yes, but since the abuse is widespread, targeting only the IBs is unwarranted.

Norm