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• Did U.S. Immigration Policy Influence India's IT Boom?

Transcript

Tim Sablik: My guest today is Nicolas Morales, an economist at the Richmond Fed whose research focuses on international trade and migration. Nicolas, welcome back to the show.

Nicolas Morales: Hey, Tim, it's great to be here.

Sablik: You recently wrote an Economic Brief with Gaurav Khanna, an economist at the University of California-San Diego, examining the role that U.S. immigration policy in the 1990s and 2000s played in the development of the IT sector in India. As always, we'll include a link to that paper in the show notes for listeners who want to dive deeper.

To set the stage, the 1990s were marked by a technological boom in the United States. Computers and the Internet became widespread in homes and offices, leading to a surge in demand for computer skills. What role did immigrants play in meeting this demand?

Morales: The early 1990s marked the beginning of the use of the Internet for commercial purposes. It led to an IT boom in the U.S. Information technology firms, particularly companies in Silicon Valley, started demanding high numbers of people with skills in computer science. And part of the demand, of course, was met with U.S. workers. So, if you're a U.S. worker, you likely started studying computer science because there was more demand. If you are on the job, you can get trained as a computer scientist.

But this type of labor supply takes some time to adjust and the growth here was very fast during the 1990s. So, a lot of this demand for computer scientists was met by hiring immigrants who are predominantly coming from India. Just to put these numbers into context, among all college graduates, those with computer science occupations went from being just 3.5 percent of total college graduates in 1995 to being 5 percent in 2000. Among those computer scientists, the share of immigrants went from being 10 percent in '95 to being about 25 percent in 2000. It means that one out of every four computer scientists was an immigrant, and a majority of those immigrants were coming from India.

Sablik: How did U.S. immigration policy change in the '90s in response to this tech sector boom?

Morales: There was a law called the Immigration Act of 1990 that set up a visa program called the H-1B visa. This program still exists until today and it's the main channel through which firms in the U.S. can hire immigrant workers with college degrees to come and work in the country. Any company can use it. But given this high demand for computer scientists, as soon as it started, the program immediately was being used predominantly by IT companies in the U.S. and was predominantly used to hire workers from India. It is still the main use of the program until today.

Once the tech boom happened around mid-'90s, the government did respond by expanding the total number of visas that were allowed. Then later in the period, they sort of came back to the original size of the total visas were allowed.

Sablik: Right, yeah. We'll talk a little bit about that. But first, I wanted to pick up on something you've been mentioning — the fact that many of the computer scientists who emigrated to the U.S. on work visas came from India. What developments in India have led to those workers representing such a large share of the foreign computer scientists in the U.S.?

Morales: India historically has had very good colleges and universities that focus on engineering — you can think of computer science skills as a part of engineering. These good schools and India being a very populous country [already provided] a big group of people that had these important skills that the market in the U.S. was looking for in the 1990s.

Another thing is that many workers in India speak English as their native language. Generally, college graduates in India are very proficient in English. That makes it a little easier when they come to the country to adapt to the U.S. and makes it easier also to get jobs in the U.S. to work on site.

Another thing that's worth mentioning is that back in the 1990s, there were very big wage differences for computer science engineers between the U.S. and India. In the mid-1990s, an engineer or computer scientist in the U.S. would earn about eight times more than an engineer or computer scientist in India. Given this very big wage difference, this was a big incentive for workers to want to migrate to the U.S. and work in the U.S.

Sablik: Were there any restrictions for skilled workers coming from other countries to come and work in the U.S. in this time?

Morales: Yes, definitely. Demand was very strong during the 1990s and they had this visa program that allowed workers to come. But still, this visa program was quite restrictive on its own. For the H1-B visa, they only allowed between 65,000 and 120,000 new visas per year — this has been throughout the history of the program.

At the same time, the way these visas generally work is that once you come to the U.S., you have three years to work for an employer. Then [you can] get renewed for an additional three years. After that, you can have your employer maybe sponsor you for a green card to stay long term. For Indians it's not that easy because there are big waitlists to get green cards. So once the six years are up on your H-1B, sometimes you're forced to return to India because you don't find an employer to sponsor you for a green card. So, another part of the restrictiveness of the program is that not only is it hard to come because it's hard to get slots to come, but also it's hard sometimes to stay working in the country.

Sablik: When looking at high-skilled immigration, people often think about the receiving country as gaining talent and the sending country as losing it. This is a phenomenon that's often referred to as "brain drain." But your research shows that sometimes the opposite can happen, a sort of "brain gain," for the sending country. What are the key factors that make that outcome possible?

Morales: This idea of brain gain is actually one of the contributions of our project. We're arguing that India did experience a brain gain that was partly driven by these immigration incentives to migrate to the U.S.

Let me give you just an example just to understand a little bit the way we are thinking about it. Imagine you are a college student in India and you're trying to decide what major you want to choose. You know that if you become an engineer or a computer scientist, then you will have way more chances to actually get a slot to migrate to the U.S. because the demand that the U.S. cannot meet with native workers is basically coming from those occupations. So, if you study engineering or computer science, it is more likely you can migrate and earn these higher wages.

However, these decisions are dynamic, so they take time to materialize. You choose a computer science major but then you study, graduate, find a job in India, and eventually you want to migrate to the U.S. But then it's not possible to actually get a slot to migrate to the U.S., in part because visas are capped. It's not that there's an unlimited number of slots to come into a country.

What happens to a person? Well, maybe they try to migrate and they cannot, so they end up staying in India. But they stay in India with these new skills they acquired that are hard to get and are valuable. They were a big driver of innovation or a big driver of "hyperactive" companies that needed this type of skills to grow and produce new products that the world was demanding. So, India gains in terms of new workers with productive skills who now are working in India and producing goods in India.

Similarly, people might need to return to India because they cannot get a visa to permanently stay in the U.S. If that happens, [those] immigrants are in the U.S. and a lot of times they learn new skills — they learn from U.S. companies, from U.S. coworkers. They gain exposure to new ideas. So, if they have to go back to India, they come back with more human capital than what they left [with].

Sablik: How did those forces shape the Indian IT sector in the 2000s?

Morales: Even though India supplied computer scientists and engineers, the tech sector in India was actually very small and not a lot was going on those years. But in the 2000s, we see a huge growth in IT in India. This growth was particularly driven by exports of IT services to the U.S. but also to the world. By 2005, India surpassed the U.S. as a top world exporter of IT services.

In this paper, we're not really saying that the U.S. immigration policy is fully responsible for the Indian IT boom. The Indian IT boom most likely would have happened regardless of U.S. immigration policy. But what we say is that some workers were incentivized to study computer science and they ended up staying in India or returning to India after being in the U.S. That helped fuel the IT boom that we observed in the 2000s for India.

Sablik: Another thing you and your co-author do in the paper is a counterfactual exercise where you look at what might have happened if U.S. immigration policy had been more restrictive in the 1990s. What did you find in that exercise?

Morales: Basically, we find that both the U.S. and India would have been worse off if the U.S. would have had a more restrictive immigration policy.

For the U.S., when they receive immigrants in the country, these immigrants were helping to meet this demand for a very productive skill. So, they were overall increasing the total productivity of the economy. When you restrict immigration, you don't have those skills anymore, and those skills were benefiting all U.S. workers.

It's true that when you have more immigrants in the labor market, they tend to compete to some extent with natives. So, if there [were] fewer immigrant computer scientists in the U.S., maybe more U.S. workers would have chosen to study computer science, to work in computer science. Fewer Indian computer scientists would mean that [native workers] would have slightly higher wages and maybe slightly higher employment in computer science. But this group is very small. When you look at the total economy, the benefits created [by] immigrants for all other types of workers compensates for whatever losses might be for U.S. computer scientists.

On the side of India, we also find that India will be worse off if the U.S. policy would have been more restrictive. Because of the prospects of migrating to the U.S., India gained more of these workers that stayed in India or that returned to India after migrating that have these new skills. These new skills help all workers in the economy to become more productive. According to our estimates, if the number of total H1-B visas between 1985 and 2010 would have been 50 percent lower than what it was in reality, we find that the Indian IT sector would be roughly 10 percent smaller than where it was in 2010.

Sablik: Nicolas, thank you so much for joining me today to discuss this research.

Morales: Thanks for having me.