Recently, the Trump Administration announced that H-1B applications would face a new $100,000 fee (in addition to the already existing fees, not to mention legal fees). The H-1B visa allows firms to hire foreign individuals with a college degree for their positions. Firms enter a lottery, and if they win the lottery, they can hire a foreign professional. The H-1B can eventually be converted into a green card. Since universities are exempt from the lottery, it is a way for foreign students to try to stay in the US after their degree. Much of this policy change is up in the air, so this post isn’t about the change per se, but rather the change prompted some thoughts.
The Trump administration argues that this fee is necessary to prevent American firms from hiring foreign workers cheaply, at the expense of American workers. Given the way it is structured, it is unlikely the H-1B visa has that effect. But, for the sake of this post, we’ll take the argument as given.
Will the fee lead to more hiring of American workers? It’s tempting to think so. After all, if the price of foreign workers rises, then fewer foreign workers will be hired. That is just the law of demand at work: as price goes up, quantity demanded goes down.
But there is an implicit assumption in the Trump administration’s argument: that domestic workers are the next-best option for firms compared to foreign workers. That is not necessarily the case. The law of demand tells us that firms will adjust their hiring, but it does not tell us along what margins firms will adjust. Perhaps they will fill their roles with American workers; after all, the cost of domestic workers is now relatively lower compared to foreign workers. But the firm could also opt to change its operations, or even relocate outside the country.
The law of demand tells us that as the price of something goes up, quantity demanded falls (all else held equal). Economic theory tells us that as relative prices change, people will adjust their behavior. But theory does not, indeed, it cannot tell us how they will adjust. That will depend on the relevant alternatives they face at the juncture of choice. What the relevant alternatives are depends on the particular circumstances of time and place they find themselves in and the goals of firms and individuals.
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