5

Foreign Workers in the IT Workforce

The IT sector and the IT-intensive industries are global: nations other than the United States consume and supply IT products and services, and nations other than the United States have individuals with the talent, motivation, and desire to work in the IT sector and IT-intensive industries. For this reason, it is necessary to understand the foreign dimensions of the IT workforce.

5.1 THE IMPACT OF FOREIGN WORKERS ON THE U.S. ECONOMY AND WORKFORCE

The impact of foreign individuals on the U.S. economy and workforce is a controversial subject, and the debate is complicated because of unspoken feelings and hidden agendas on the part of various stakeholders.

As the world's economy becomes increasingly global, so too does the workforce of many U.S. firms. Among the reasons for using foreign workers is the fact that the United States does not have a monopoly on productive, knowledgeable, and motivated individuals; rather, such workers are found all over the world. Foreign workers can make positive contributions to the U.S. economy in a number of different ways:

  • Foreign IT workers may bring to the United States the language,



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Building a Workforce for the Information Economy 5 Foreign Workers in the IT Workforce The IT sector and the IT-intensive industries are global: nations other than the United States consume and supply IT products and services, and nations other than the United States have individuals with the talent, motivation, and desire to work in the IT sector and IT-intensive industries. For this reason, it is necessary to understand the foreign dimensions of the IT workforce. 5.1 THE IMPACT OF FOREIGN WORKERS ON THE U.S. ECONOMY AND WORKFORCE The impact of foreign individuals on the U.S. economy and workforce is a controversial subject, and the debate is complicated because of unspoken feelings and hidden agendas on the part of various stakeholders. As the world's economy becomes increasingly global, so too does the workforce of many U.S. firms. Among the reasons for using foreign workers is the fact that the United States does not have a monopoly on productive, knowledgeable, and motivated individuals; rather, such workers are found all over the world. Foreign workers can make positive contributions to the U.S. economy in a number of different ways: Foreign IT workers may bring to the United States the language,

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Building a Workforce for the Information Economy cultural, or specialized engineering skills needed for the internationalization and localization of software products.1 They bring knowledge and expertise obtained in their home countries for which the United States did not pay, certainly for K-12 education and in some cases for higher education. That is, the United States reaps the benefits of their education without paying its cost, because their home nations paid for their education. They facilitate trade with their countries of origin and links between domestic technology businesses and those in their countries of origin. Box 5.1 illustrates the impact of immigrants on an economically important region of the United States: Silicon Valley. They increase the level of talent in the U.S. workforce, because foreign workers coming to the United States for IT jobs tend to have higher educational levels compared to the average foreign (or U.S.) worker).2 To the extent that companies need individuals with adequate formal training in computer science, they may well turn to foreign workers who have the necessary formal training if they are unable to find domestic workers with such training. U.S. firms may be able to reduce significantly their labor costs to the extent that foreign workers are willing to work for less than comparable U.S. workers when these foreign workers are located abroad in relatively low-wage countries. (Other reasons for U.S. firms to locate work abroad are discussed in Section 5.3.2.) They contribute to national output. To the extent that foreign workers specialize in activities that would not otherwise exist domestically (and given growing use of IT throughout the U.S. economy, they clearly play some role in meeting demands that arise from growth), the native population benefits overall because it can consume the output of that production.3 1   Specialized engineering skills could entail changes in the display routines of an operating system to allow Arabic or Hebrew characters to display from right to left, without any loss of formatting, hyphenation, and page breaks, or changes in drivers to accept input from a keyboard designed for Japanese characters (Kanji). (The Japanese keyboard uses Kana, a Japanese phonetic alphabet to prompt the display of several Kanji characters from which the user can select.) 2   See, for example, Ellis, Richard, and B. Lindsay Lowell. 1999. “Foreign-Origin Persons in the U.S. Information Technology Workforce, ” Report III of the IT Workforce Data Project. New York: United Engineering Foundation. Available online at <http://www.uefoundation.org>. 3   See, for example, National Research Council. 1997. The New Americans: Economic, Demographic, and Fiscal Effects of Immigration. James P. Smith and Barry Edmonston, eds. Washington, D.C.: National Academy Press.

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Building a Workforce for the Information Economy BOX 5.1 Illustrative Contributions of Immigrants to the U.S. Economy “[F]oreign-born engineers in Silicon Valley's technology industry make a substantial and growing contribution to regional job and wealth creation . . . . The entrepreneurial contributions of these skilled immigrants are impressive. In 1998, Chinese and Indian engineers, most of whom arrived in the United States after 1970 to pursue graduate studies, were senior executives at one-quarter of Silicon Valley's new technology businesses. These immigrant-run companies collectively accounted for more than $16.8 billion in sales and 58,282 jobs in 1998. Moreover, Chinese and Indian immigrants started companies at an accelerating rate in the 1990s. “The economic contributions of immigrants are not limited to their direct role as engineers and entrepreneurs. Although Silicon Valley 's new immigrant entrepreneurs are more highly skilled than their counterparts in traditional industries, like those counterparts they have created a rich fabric of professional and associational activities that facilitate immigrant job search, information exchange, access to capital and managerial know-how, and the creation of shared ethnic identities. The region's most successful Chinese and Indian entrepreneurs rely heavily on such ethnic resources while simultaneously integrating into the mainstream technology economy. “These networks are not simply local. Silicon Valley's new immigrant entrepreneurs are building far-reaching professional and business ties to regions in Asia. They are uniquely positioned because their language skills and technical and cultural know-how allow them to function effectively in the business culture of their home countries as well as in Silicon Valley. A transnational community of Chinese—primarily Taiwanese—engineers has thus fostered two-way flows of capital, skill, and information between California and the Hsinchu-Taipei region of Taiwan. In this process, Silicon Valley-based entrepreneurs benefit from the significant flows of capital that these immigrants coordinate, as well as from the privileged access that they provide to Asian markets and to Taiwan's flexible, state-of-the-art semiconductor and personal computer manufacturing capabilities. Silicon Valley 's Indian-born engineers have played a similar, but more arm's-length role, linking technology businesses in Silicon Valley with India's highly skilled software programming and design talent. These long-distance social networks enhance economic opportunities for California and for emerging regions in Asia. “[S]killed immigrants contribute to the dynamism of the Silicon Valley economy, both directly, as engineers and entrepreneurs, and indirectly, as traders and middlemen linking California to technologically advanced regions of Asia.” SOURCE: Excerpted from Saxenian, AnnaLee. 1999. Silicon Valley's New Immigrant Entrepreneurs, Executive Summary. San Francisco: Public Policy Institute of California. Available online at <http://www.ppic.org/publications/PPIC120/ppic120.sum.html>.

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Building a Workforce for the Information Economy As do domestic entrepreneurs, scientists, and engineers, so also foreign entrepreneurs, scientists, and engineers create jobs.4 Entrepreneurs create businesses that hire others, while scientists and engineers—through the science and engineering that underlies new technologies—create jobs for other scientists and engineers working with those technologies. At the same time, foreign workers in the United States can have negative impacts as well: Learning from U.S. IT sector firms, they may bring back to their home countries expertise and knowledge that they can use to compete more effectively against U.S. companies. The availability of foreign workers to U.S. employers raises the supply of labor for those jobs that foreign workers will fill. As with any increase in the supply of available workers, the use of foreign workers may have deleterious effects on the wages and job security of U.S. workers who might otherwise do the work entrusted to foreign workers. To the extent that foreign workers compete with native U.S. workers, economic principles suggest that (a) the foreign workers may displace the domestic workers and (b) the presence of the foreign workers may hold down wages in those jobs.5 Wages may be depressed even if all employers paid temporary nonimmigrant workers the wages prevailing for the jobs for which these nonimmigrant workers are hired. This remainder of this chapter discusses in more detail the use of foreign IT workers in the United States and in their native lands by U.S. firms. 4   For example, foreign-born individuals have been instrumental in starting major U.S. hardware, software, and semiconductor firms, including Wang, Intel, Sun, and Computer Associates. 5   This outcome was endorsed by Federal Reserve Chairman Alan Greenspan when he argued in testimony before the House Banking Committee on February 16, 2000, that the availability of foreign workers was a critical factor in holding down wage inflation during a long period of economic growth. Specifically, he stated that ”. . . imbalances in the labor markets perhaps may have even more serious implications for inflation pressures. While the pool of officially unemployed and those otherwise willing to work may continue to shrink, as it has persistently over the past 7 years, there is an effective limit to new hiring, unless immigration is uncapped. At some point in the continuous reduction in the number of available workers willing to take jobs, short of the repeal of the law of supply and demand, wage increases must rise above even impressive gains in productivity. This would intensify inflationary pressures or squeeze profit margins, with either outcome capable of bringing our growing prosperity to an end.”

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Building a Workforce for the Information Economy 5.2 FOREIGN WORKERS IN THE UNITED STATES For many foreign IT workers, the United States is more attractive than other nations as a place to work. One reason is that English is by far the dominant language of information technology, and many foreign IT workers already have some basic fluency with English. Thus, in choosing a nation in which English is the language of social and business interaction, they do not need to learn another language to function well in that (new) country. The United States has a reputation as a land of free enterprise where individuals can start new businesses and achieve great success,6 or, perhaps more realistically, find attractive job prospects and maximize their earning potential. And, historically the United States has been much more tolerant of ethnic diversity than have many other nations. 5.2.1 Foreign Workers Overall For purposes of this report, a foreign worker is a foreign-born individual who is either a temporary nonimmigrant worker or a permanent resident of the United States. Foreign workers enter the U.S. workforce through two different channels: direct recruitment from abroad and change or adjustment of the status of an individual already in the United States.7 And, the sponsoring party can be a U.S. firm that employs the worker directly, a foreign company that has a branch office (unincorporated) in the United States, or an intermediary U.S.-based organization that employs the worker on behalf of a U.S. firm. In some cases, the intermediary organization has close ties to a foreign IT firm that is doing work outsourced from the U.S. firm; in other cases, the intermediary organization functions as a “temp agency” that places its workers in assignments of varying length with U.S. firms, who then use these temporary placements as a way of trying out these workers and possibly selecting them for permanent hires. Flows of foreign workers into the United States have remained roughly constant over the last decade, though the mix of permanent immigrants and temporary nonimmigrant workers has varied. In general, foreign-born individuals constituted about 17 percent of the Category 1 IT workforce in 1998, compared to about 10 percent of the total U.S. popula- 6   See, for example, Spaeth, Anthony, 2000, “The Golden Diaspora,” Time, June 19; Chabria, A., “Silicon Raj,” Upside, July 25, p. 155. 7   A change of status refers to a change from one nonimmigrant visa status to another (e.g., from F-1 to H-1B); an adjustment of status refers to adjusting one's status from that of a nonimmigrant (e.g., an H-1B) to that of a permanent resident or immigrant by submitting an adjustment application to a local INS office.

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Building a Workforce for the Information Economy tion.8 In addition, they tend to cluster geographically, living in just a few states, most of which have large concentrations of other foreign-born individuals. 5.2.2 Foreign Worker Programs Because differences between permanent residents (also known as green-card holders) and temporary nonimmigrant workers are an essential nuance of the policy debate over the use of foreign talent in the United States, the next two subsections address these programs in more detail. Permanent Residents A permanent resident of the United States is a noncitizen who is entitled to remain and work in the United States indefinitely. Numbers of Permanent Residents By law, 140,000 permanent residents can be admitted to the United States each year based on their job skills. This figure is subject to numerical limits based on country of origin and categories of workers. It also includes both the principal alien and his immediate family, so the actual number of “workers” is significantly lower than 140,000. The major categories of workers are the following: Priority workers. Up to 40,040 of the employment-based visas may go to workers of “extraordinary ability,”9 professors and researchers who are internationally recognized as outstanding in a specific academic field,10 8   See, for example, Ellis, Richard, and B. Lindsay Lowell. 1999. “Foreign-Origin Persons in the U.S. Information Technology Workforce, ” Report III of the IT Workforce Data Project. New York: United Engineering Foundation. Available online at <http://www.uefoundation.org>. (The term “foreign-born” as defined in this report includes foreign workers, foreign students in the United States, and naturalized U.S. citizens. Thus, the Ellis and Lowell estimate of foreign-born IT workers is higher than the percentage of H-1B workers in IT, which is estimated at 10 percent. See discussion at footnote 19.) 9   “Extraordinary ability” in the sciences, arts, education, business, or athletics must be demonstrated by sustained national or international acclaim and achievements that have been recognized in the field through extensive documentation. INS regulations suggest that only a small percentage of aliens will have risen to the very top of their field of endeavor. Workers of “extraordinary ability” are essentially limited to Nobel Prize winners, world-renowned entertainers, and individuals of similar stature. 10   Under this category, individuals must have a minimum of 3 years of experience in teaching and/or research in that field and enter the United States in a tenure or tenure-track teaching or comparable research position at a university or other institution of higher education, or in a comparable research position with a private employer, and have a record of outstanding teaching or research.

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Building a Workforce for the Information Economy and executives and managers of foreign companies who are permanently transferred to the United States.11 Professionals with advanced degrees and/or exceptional ability in the sciences, arts, or business. Up to 40,040 of the employment-based visas may go to workers who are “members of the professions holding advanced degrees or their equivalent,” or workers “who because of their exceptional ability in the sciences, arts, or business will substantially benefit prospectively the national economy, cultural or educational interests, or welfare of the U.S.” (8 USC 1153). Skilled workers, professionals, and other workers. Up to 40,040 of the employment-based visas may go to skilled workers with at least 2 years of experience, professionals with a baccalaureate degree, and other workers with less than 2 years of experience. (An additional 19,880 visas are reserved for so-called special immigrants and employment creation visas, neither of which is relevant here.) Obtaining a Green Card In order to obtain permanent residency (a “green card”) most workers in the above categories must first obtain a permanent labor certification (PLC) from the Department of Labor (DOL).12 To obtain a PLC, a prospective employer must test the U.S. labor market under DOL supervision to ensure that there are no minimally qualified U.S. workers interested in and available for the position for which an alien is sought and that the employment will not adversely affect the wages and working conditions of similarly employed U.S. workers.13 11   The executive must manage the organization or a department, subdivision, function, or component of the organization; supervise and control the work of other supervisory, professional, or managerial employees or manage an essential function within the organization, or a department or subdivision of the organization; have the authority to hire and fire; and exercise discretion over the day-to-day operations of the activity or function for which the employee has authority. In concept, it is similar to the requirements imposed on individuals in the L nonimmigrant category. 12   The primary exception is for individuals of extraordinary ability, for whom no job offer need exist and no permanent labor certification is necessary. In addition, a PLC is not required if the prospective immigrant can show that his or her employment would be in the “national interest” (although the INS has dramatically limited national interest waivers since issuing a restrictive decision in August 1998). 13   Note a significant unintended consequence of this requirement. While the PLC application is pending, the employer cannot materially change the job duties of the applicant, even if the applicant is already working in the job (e.g., on an H-1B visa), because INS rules require the applicant to be performing the job duties described in the approved labor certification at the time he or she applies for adjustment of status. And the employer cannot change the location of the job at all (unless the new location is in the same metropolitan area as the old) because of the potential impact on wages.

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Building a Workforce for the Information Economy A labor certification consists of two steps.14 First, the prospective employer files an application with the local state employment office describing the position and its minimum requirements and the foreign worker's education and experience, and stating a prevailing wage for persons similarly employed in the area of intended employment. The local office supervises this recruitment phase of the labor certification, which generally requires that employers place specialty job advertisements in newspapers and trade journals and interview qualified candidates. Second, this office forwards the case to the regional DOL office, which either approves the case or issues a notice listing possible deficiencies in the job requirements or recruitment (in which case the employer must delete these contested requirements and re-advertise to avoid a denial). After the PLC is approved, the employer files an immigrant visa petition with the Immigration and Naturalization Service (INS). The immigrant visa petition establishes that both the job in question and the sponsored worker meet the relevant definitions for experience and/or education as well as any job requirements specified in the labor certification. Finally, the foreign national must apply for immigrant status, either at a U.S. consulate abroad or—more commonly—by submitting an application at the local INS office to adjust his or her status from that of a nonimmigrant (e.g., an H-1B) to that of an immigrant. A foreign national must satisfy many requirements to qualify for adjustment of status, a process that generally takes about 12 to 18 months (due to backlogs in security checks provided by the Central Intelligence Agency and other processing delays). One of the most important requirements is the applicant's immediate eligibility for an immigrant visa under the numerical quota system, and an applicant's position in the queue is established by the date on which the PLC is filed (the priority date) (Box 5.2). Applicants who bump up against the per-country quotas (because their priority date is too late) must wait until additional slots are made available in subsequent fiscal years. The time required to obtain permanent residence for professional workers is measured in years. At best, it takes about 2 to 3 years. In the worst-case scenario (which is not limited to isolated cases), it may take 8 to 10 years.15 The steps and intervals are as follows: 14   In cases where the position in question appears on a list of occupations considered in short supply by DOL (including nurses, physical therapists, and certain aliens of exceptional ability), an automatic labor certification is granted. 15   While an H-1B visa holder is in the middle of the green-card process, he or she usually retains an H-1B status for both work authorization and travel purposes. If the H-1B visa expires first, a number of complex scenarios can play out. However, a detailed description of these scenarios is not relevant to this report.

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Building a Workforce for the Information Economy BOX 5.2 Per-Country Quotas In general, the allocation of immigrant visas is controlled by a system of worldwide numerical limitation based upon country of origin and the chronological order of the date of filing a labor certification or immigrant visa petition, depending upon the requirements of the visa category. (This date is called the “priority date.”) As noted in the main text, the maximum quota for all employment-based immigration is 140,000 per year. About 70,000 of these visas are reserved for the two categories of professional workers requiring labor certifications. In FY1998, the Immigration and Naturalization Service admitted fewer than 50,000 immigrants in these categories, but this number was artificially low due to severe delays (1 to 2 years) in processing adjustment-of-status applications; as INS begins to approve these delayed cases, and the increased numbers of H-1B workers admitted in FY1999 to FY2001 begin to apply for permanent resident status, the 50,000 figure will skyrocket, likely resulting in visa backlogs in these two visa categories. Additionally, persons born in certain high-demand countries (such as India and China) also must contend with per-country limitations of less than 10,000 visas per country per year. Beginning in 1996 for India and 1997 for the People's Republic of China, per-country backlogs have resulted in visa waiting periods of 1½ to 3 years for Indian nationals and from 2 to 4 years for PRC nationals. In other words, even though there are 20,000 unused employment-based visas, a visa backlog arises in any year during which the demand for such visas from Indian or PRC nationals exceeds 10,000 per year (including the foreign worker's spouse and children). Whenever this occurs, visa applicants from these countries must wait until more visas become available in subsequent fiscal years before they can complete their quest for permanent residence. Labor certification, 1/2 to 4 years; Immigrant visa petition, 1/2 to 1 year; Adjustment of status, 1 to 11/2 years; and Delays due to per-country limits, 0 to 3 years. Temporary Nonimmigrant Workers The United States allows those on temporary visas to enter the United States for periods of limited, but varying, duration for a number of purposes, including employment, study, and tourism. These individuals are generically categorized as nonimmigrants because nonimmigrants, in contrast to immigrants, are not expected to remain in the United States permanently. Many nonimmigrant categories permit aliens to work while they are in the United States; such individuals are classified as temporary

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Building a Workforce for the Information Economy nonimmigrant workers. For purposes of this report, the most significant nonimmigrant visa category is the H-1B visa. (Box 5.3 describes other important nonimmigrant visas.) H-1B visas are available for a maximum of 6 years to foreign persons with skills in a “specialty occupation,” i.e., those that require both (a) theoretical and practical application of a body of highly specialized knowledge and (b) attainment of a bachelor's degree or higher (or its equivalent) in the specialized field as a minimum for entry into the occupation. Some of the fields included in “specialty occupation” include architecture, engineering, computer programming, accounting, medicine, teaching, and so on. The theory underlying the H-1B program is that temporary workers play an important role in helping to meet workforce needs in times of labor market tightness. However, during slack labor markets, the presence of such workers can complicate efforts to ensure that qualified U.S. workers are able to find work. The time lines built into the H-1B program (6-year maximum, renewable once after 3 years) allow for a significant reduction in the H-1B workforce in 3 years (to 65,000 admitted per year, or a total of 390,000 H-1B visa holders in the steady state), assuming a concurrent decision to refrain from converting H-1Bs to permanent residency.16 Thus, in principle though perhaps not in practice, the program has a degree of built-in flexibility that policymakers can use to respond to serious recessions, during which labor markets tend to slacken. Numbers of H-1B Visas and Workers The American Competitiveness and Workforce Improvement Act of 1998 (ACWIA) temporarily raised the level of temporary nonimmigrant H-1B visas from 65,000 (the cap level established in 1990) to 115,000 in FY1999 and FY2000, dropping it to 107,500 in FY2001, and then reverting to 65,000 in FY2002. Currently, proposed legislation would raise these caps again. While data on H-1B visa holders are scarce, in February 2000 the INS released the results of a one-time study of H-1B visa holders,based on a random sampling of approximately 4,200 H-1B holders admittedduring the 15 months from May 1998 to July 1999.17 According to this survey, approximately 56.7 percent of H-1B visaholders were employed in occupations 16   Note that under international commitments that the United States has formalized under the General Agreement on Trade in Services, the United States is barred from lowering the H-1B limit below 65,000. This commitment is expressed in the U.S. Schedule of Commitments and List of MFN Exemptions in the Final Texts of the Uruguay Round of Multinational Trade Negotiations, signed on April 15, 1994, in Marrakech, Morocco. 17   U.S. Immigration and Naturalization Service. 2000. Characteristics of Specialty Occupation Workers (H-1B). Washington, D.C.: Immigration and Naturalization Service, February.

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Building a Workforce for the Information Economy BOX 5.3 Major Non-H-1B Nonimmigrant Visa Categories “E” Treaty Traders and Investors E visa holders enter the United States under the provisions of a specific treaty of commerce and navigation (or a bilateral investment treaty) between the United States and the alien's native country. An E-1 visa holder enters to engage in trade between the foreign country and the United States. An alien may also qualify as a treaty investor to develop and direct the operations of an enterprise in which he or she has invested, or of an enterprise in which he or she is actively in the process of investing a substantial amount of capital. The E category also allows certain key employees (executives, supervisors, and persons with essential skills) to enter in treaty-trader or treaty-investor status. “F” Foreign Students F visa holders are primarily undergraduate and graduate students at U.S. colleges and universities. After 1 year in F visa status, a foreign student becomes eligible for on-campus work or off-campus work if he or she can prove financial hardship, primarily in nonskilled positions. F-1 foreign students are also eligible for “practical training” during which they may work for a U.S. employer in the field of their studies, either in a work/study program or internship, during annual vacations, or after completion of a course of study. “J” Exchange Visitors and Spouses J visa holders include a wide variety of foreign nationals whose purposes in the United States range from students to trainees to summer camp counselors to au pairs. However, they are generally prohibited from remaining in the United States that are explicitly computer-related (mostly in systems analysis and programming); an additional 4.9 percent were employed in “electrical and electronics engineering” occupations, and a significant fraction of these individuals certainly work in the IT field. H-1B visa holders in systems analysis and programming received a median wage, not including bonuses or benefits, of $47,000 (Table 5.1). Nearly half of all H-1B visa holders (47.5 percent) came from India, with 9.3 percent coming from China. As for formal education, 41 percent of all H-1B visa holders had post-baccalaureate degrees; of those employed as systems analysts and programmers, about 34 percent had a master's degree or higher. Finally,

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Building a Workforce for the Information Economy incoming domestic workers or to foreign workers—is that they may well influence the wages that must be paid to others in the firm.) However, if the H-1B worker were not available, the employer would have to seek a domestic worker. Under tight labor market conditions, the employer might well have to offer a domestic worker wages or hours or conditions of employment that are better than those for others in the company. If so, the effect of the H1-B program is not necessarily to depress wages and working conditions but rather to keep them from rising as rapidly as they would if the program did not exist. Unfortunately, the magnitude of such an effect is hard to estimate with confidence. In a study of the economic impact of immigrants, the National Research Council used an empirically based elasticity of demand for labor of about 0.3, suggesting that a 10 percent increase in the size of the labor force would result in the wage of competing workers being reduced by about 3 percent below what it would have been in the absence of that labor pool increase.36 However, this estimate is based primarily on studies that have focused on all foreign-born individuals and not only “highly skilled” foreign workers, such as those with H-1B visas. As such, the committee has not found sufficient evidence on the magnitude of wage and employment effects to make a judgment about the effects of the program on domestic IT workers. This discussion also highlights the fact that the committee has not found an analytical basis on which to determine the optimal number of H-1B visas. Without such a basis, decisions to reduce or increase the cap on H-1B visas are fundamentally political, and outcomes in such a process depend primarily on political balances of power. That said, the committee notes that an increased number of H-1B visas will likely result in future additional pressure on the already beleaguered permanent immigration program unless Congress also adjusts the various numerical limits on permanent residents. Table 5.2 summarizes the various pros and cons of changing the level of H-1B visas. 5.3 AVAILABILITY OF FOREIGN IT WORKERS TO U.S. FIRMS U.S. firms can use foreign IT workers in two ways: they can be brought to the United States (in which case other nations can compete for their services), or they can be used in their home nations. 36   See National Research Council. 1997. The New Americans: Economic, Demographic, and Fiscal Effects of Immigration. Smith, James P., and Barry Edmonston, eds. Washington, D.C.: National Academy Press.

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Building a Workforce for the Information Economy TABLE 5.2 Pros and Cons of Changes to H-1B Levels   Reduced H-1B Levels Increased H-1B Levels Pros Encourages effective use of U.S. workers, raising skill levels through training Boosts wages for employees Provides immediate relief for labor market tightness Allows more rapid growth of IT sector Dampens wage costs for employers Increases supply of IT workers Cons Opportunities lost, growth forgone Increased wage costs for employers Possibility that work may be exported Dampens wage growth for employees Sends potentially wrong messages to workers and educational establishments In case of recession, could lead to unemployment and repatriation problems Increases demand for permanent visas 5.3.1 Competition for Foreign Workers The United States is not the only nation with a strong IT sector, and demand for overseas IT workers is expected to increase as other developed countries face tightness problems in their IT labor markets. Germany has established an allocation of 10,000 “green cards” for highly qualified immigrants from outside the European Union as part of its efforts to relax restrictions on the use of nonindigenous IT talent.37 Japan plans to hire up to 10,000 Indian software engineers to meet a shortage of qualified IT workers.38 In the United Kingdom, the government is looking to initiate a new immigration policy to help end skill shortages in the U.K. economy, signaling a break with the “closed-door” policy on economic immigrants in place since the early 1970s.39 Furthermore, the IT industries of the countries from which these workers come are also growing. Particularly important in this context is 37   See Tagliabue, John, 2000, “Sprechen Sie Technology? Europeans Try to Relax Borders for Skilled Workers,” New York Times, May 5, Business Section, p.1 ; Bröll, Claudia, 2000, “Indonesia Technician Accepts Green Card,” Frankfurter Allgemeine, July 31. 38   “Japan to Hire 10,000 Indian Software Engineers,” Times of India, May 16, 2000. 39   Adams, Christopher, and Rosemary Bennett. 2000. “Immigrant Policy Aims to Close Skills Gap,” Financial Times, August 11.

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Building a Workforce for the Information Economy the Indian IT industry, given that about half of the H-1B visas for IT are held by Indian nationals. According to the initial findings of a study by the National Association of Software and Service Companies (NASSCOM), 340,000 software professionals were employed in the Indian software and services industry in March 2000, more than double the number employed 3 years before.40 Despite expectations of strong growth in the Indian software industry, the study predicts no shortage of skilled IT workers in India until 2002-2003, when the IT labor market there will become very tight unless immediate steps are taken by the Indian government and the Indian software industry. Growth in the IT industries abroad and the accompanying competition for talent from nations such as India may restrict the supply of foreign workers to the United States. Of course, because the trajectory of future demand for foreign IT workers here and abroad is unknown, as is that of production rates of qualified foreign IT workers, this outcome is by no means a certainty. 5.3.2 Locating IT Work Abroad Another way for U.S. firms to use foreign IT talent is to locate work abroad. One approach is for a U.S. firm to outsource work to foreign IT companies or to give it to a foreign subsidiary. For example, a U.S. IT-intensive company may contract with a foreign IT firm to develop a needed business system. A U.S. IT-sector company may contract with a foreign IT firm to handle product testing or documentation or even program coding. A second approach is for a U.S. firm to establish its own presence (e.g., through a subsidiary) in a foreign land. In some instances, companies establish a foreign presence in order to be closer to customers and more in touch with their needs and to develop new products for a wider audience (i.e., products that are not targeted just to U.S. customers). Often, marketing to foreign countries is more effectively undertaken with local presence. And, sales, support, and servicing are much easier through local offices. A U.S. firm might establish an R&D laboratory near foreign centers of excellence, so as to monitor technological developments occurring in the host nation and to tap into the expertise that would now be local and develop familiarity with new science and technology.41 40   “NASSCOM for Immediate Action to Increase Supply of Knowledge Workers, ” NASSCOM press release, New Delhi, April 17, 2000. 41   According to the U.S. Department of Commerce, the IT industry is less likely, on average, than other R&D-intensive industries to carry out R&D abroad. When the intensity of R&D globalization is defined as the ratio of foreign to domestic R&D spending by U.S. companies, the industry with the highest level of R&D globalization is drugs and medicines (globalization ratio = 33 percent). The computer (ratio = 4.2) and electronic/electrical equipment (ratio = 5.6) industries have the lowest levels of R& D globalization. (See Dalton, Donald H., and Manual G. Serapio. 1999. Globalizing Industrial Research and Development. Washington, D.C.: U.S. Department of Commerce, Technology Administration, Office of Technology Policy.) Nevertheless, a number of major U.S. IT firms have R&D labs abroad; these firms include Microsoft, Intel, IBM, and Hewlett-Packard.

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Building a Workforce for the Information Economy Or a firm that wishes to develop a new product line may locate work abroad because of opportunities afforded by its relative isolation—such isolation may help to insulate the unit undertaking the development from “cultural” dimensions extant in the mother firm's U.S. locations that are incompatible with developing the new product line.42 At other times, U.S. investment in overseas locations is part of a large package that a U.S. company has negotiated with a foreign country. For example, a U.S. company might agree to locate a facility in another nation as part of a sales agreement with that nation. A foreign facility might be established to reduce costs (e.g., through the use of cheaper labor, or by taking advantage of subsidies or incentives provided by the foreign host nation, or by overcoming locally imposed tariff barriers). Finally, the public relations value of being seen as a “local” company and the intellectual opportunities to collaborate in foreign research consortia should not be underestimated. 43 Box 5.7 provides some historical perspective on overseas investment. For U.S. employers that wish to take advantage of lower foreign labor costs (which may be lower by factors of 3 and 4 in certain Asian countries), locating work abroad is the most effective approach to doing so. In some cases, a firm may move abroad to take advantage of a greater certainty in the rapid availability of qualified IT workers. On the other hand, locating work abroad can have many costs. When work can be cleanly partitioned from other work so as to minimize communication between parties doing each type of work, location abroad is likely to be successful. But when large amounts of communication are needed, location abroad becomes much more problematic.44 42   For example, a firm may have an engineering culture that values high performance and sophistication, with cost being a relatively secondary issue. If that firm wishes to develop products that are less expensive, it may well make sense to conduct the development of such products in an environment where that culture is not operative—which may call for geographical separation. 43   More discussion of these rationales can be found in Dalton and Serapio, 1999, Globalizing Industrial Research and Development. 44   Some of the following is discussed in greater detail in Callan, B., S. Costigan, and K. Keller. 1998. Exporting U.S. High Tech: Facts and Fiction about the Globalization of Industrial R&D, Study Group Report. Washington, D.C.: Council on Foreign Relations.

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Building a Workforce for the Information Economy BOX 5.7 Investment Abroad by the IT Industry An Early 1990s Perspective1 Foreign Facilities “The globalization of the [IT] industry also is reflected by generally increasing foreign direct investment by all U.S. computer hardware manufacturers except supercomputer firms, which remain firmly placed in the United States. U.S. firms' cumulative foreign direct investment in computer-related facilities stood at $20.6 billion in 1991. By positioning facilities near foreign customers, companies improve customer service and reduce transportation costs on increasingly price-sensitive goods. “U.S. foreign direct investment likely will continue to expand in the future because some foreign markets are growing more rapidly than the U.S. market. Between 1988 and 1991, for example, the average annual growth rates of Asian and European computer markets consistently exceeded 10 percent, compared with average annual growth rates of less than 5 percent over the same period in the United States. Customers outside the United States now account for 65 percent of global computer purchases. “Although small by comparison, foreign firms' direct investment in the United States has been growing at a relatively steady pace as these companies pursue advanced technologies and research facilities in this country. Foreign firms' cumulative direct investment in the U.S. computer industry totaled $2.9 billion in 1991.” Strategic Alliances “Joint ventures, collaborative research programs, and formal technological alliances involving U.S. and foreign computer hardware manufacturers have proliferated in recent years. In many instances, U.S. firms have allied themselves with foreign competitors. One of the primary reasons for establishing a cooperative alliance is to share the costs and risks associated with research and product development. Companies competing within the same product segment occasionally form alliances to conduct precompetitive research. For example, IBM has formed a joint research venture with Toshiba and Siemens-Nixdorf to develop a new generation of memory chips. In other cases, companies look beyond their immediate competitors and cooperate with firms capable of supplying complementary technology. For example, Apple Computer combined its considerable computer design skills with Sony's expertise in manufacturing and miniaturization to produce the 3-pound PowerBook notebook computer. 1   Text extracted from U.S. International Trade Commission. 1993. Global Competitiveness of U.S. Advanced Technology Industries: Computers, Investigation No. 332-339, Publication 2705.

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Building a Workforce for the Information Economy “Strategic alliances are also used to increase a company's involvement in and knowledge of a foreign market. Because consumer demands and expectations may vary in different markets, many firms prefer to enter new geographic markets by forming alliances with companies having a long-standing regional presence. IBM, for instance, has entered a marketing alliance with Hitachi to distribute IBM notebook computers in Japan, a country in which long-standing distributor contacts are reportedly essential. “Finally, the number of strategic alliances has increased in direct proportion with company cost-cutting and streamlining efforts. Some companies have narrowed their business focus to manage costs more effectively, and consequently have formed partnerships that allow them to rely on other firms to perform important production, sales, and delivery tasks. Sun Microsystems' alliance with Fujitsu in the development and production of workstation microprocessors typifies such alliances.” A Mid-1990s Perspective: Employment in U.S. Parent Companies and Their Affiliates Abroad Comparison of employment at U.S parent companies with employment at their foreign affiliates over the period from 1994 to 1997 indicates the following for the industry groupings most relevant to the IT industry (data from a finer categorization are not published):2 For computer and office equipment, employment at U.S. parent companies totaled around 400,000, while employment at their foreign affiliates grew to approximately the same number (Table 5.7.1). For electronic components and accessories, employment at U.S. parent companies grew at a rate of 3 percent per year, and employment at foreign affiliates was about three-quarters of the employment at U.S. parent companies. For computer and data-processing services (including software), employment at U.S. parent companies grew at a rate of 23 percent per year, while employment at foreign affiliates grew even faster. Employment at foreign affiliates as a percentage of employment at U.S. parent companies grew from 29 percent in 1994 to 39 percent in 1997. Thus, the IT industry has invested heavily abroad, particularly in the computer and office equipment industries and the electronic components and accessories industries. The computer and data-processing services industries have invested less heavily, although employment in U.S. parent companies is growing rapidly and employment in their foreign affiliates is growing even more rapidly. 2   These data, taken from the annual “U.S. Direct Investment Abroad: Operations of U.S. Parent Companies and Their Foreign Affiliates” produced by the Bureau of Economic Affairs at the Department of Commerce, give some appreciation of recent investments abroad by the U.S. IT industry. TABLE 5.7.1 Number Employed (thousands) in U.S. Parent Companies and Foreign Affiliates by IT Industry Sector, 1994 to 1997   Computer and Office Equipment Electronic Components and Accessories Computer and Data-Processing Services (including Software) Year At U.S. Parent At Foreign Affiliates At Affiliates as Percentage of Parent At U.S. Parent At Foreign Affiliates At Affiliates as Percentage of Parent At U.S. Parent At Foreign Affiliates At Affiliates as Percentage of Parent 1994 430.2 379.8 88 407.5 n/a   196.1 56.9 29 1995 395.2 373.1 94 423.5 303.3 72 251.3 88.4 35 1996 417.9 373.0 89 438.6 313.6 72 355.3 126.4 36 1997 408.7 433.4 106 444.5 338.8 76 363.6 143.0 39

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Building a Workforce for the Information Economy Different time zones (and 6- to 12-hour time differences) inhibit regular communication. (At the same time, they can facilitate around-the-clock operation when the work is easily transferable from one location to another.) The use of different spoken languages can lead to difficulties in communication. Even if the spoken language is nominally English, American English and Indian English are not the same, and cultural references and idioms are clearly different. Informal communication is dramatically reduced, with the result that formal channels of communication (e-mail, phone calls, voice mail, teleconferencing) become necessary to communicate what could be communicated over lunch or in a chance hallway encounter.45 This in turn adds to overhead. Creativity and spontaneity may also suffer, since these are often the result of chance interactions. Foreign nations may lack an adequate IT infrastructure to support active collaboration over large distances. Nevertheless, certain foreign nations, notably India and Ireland, have sought to nurture nascent IT industries by paying a great deal of attention to infrastructure. Many foreign nations operate under legal regimes that are very different from that which characterizes the United States. For example, some foreign nations have laws (or practices) that allow for the routine surveillance of business communications, the results of which are passed to indigenous businesses in an attempt to seek competitive advantage. Anticorruption laws may be weak, placing U.S. businesses operating in foreign lands at a disadvantage. This is not to say that technological innovations could not help to mitigate some of these difficulties, but it is safe to say these innovations have not yet materialized in a form that eliminates most such difficulties. Location of work abroad also has disadvantages for the U.S. economy. Dollars spent abroad do not contribute directly to the U.S. gross national product and do not contribute to the number of domestic jobs, and other jobs associated with the use of foreign workers here in the United States might well follow these individuals overseas. 46 45   Cockburn finds that remote collaboration often entails the loss of physical proximity, multiple communication modalities (e.g., gestural or facial communication), vocal inflection, and timing that may emphasize the importance of a sentence, or interactive questions and answers that can help to reveal ambiguities in someone's explanation. See Cockburn, Alistair. 1999. “Characterizing People as Non-Linear, First-Order Components in Software Development,” Humans and Technology Technical Report, TR 99.05, October. Available online at <http://members.aol.com/humansandt/papers/nonlinear/nonlinear.htm>. 46   Although the decision to locate work abroad involves both benefits and costs and is determined by many factors, an inability to hire adequate numbers of workers in a timely fashion may encourage more firms to locate work abroad. (For example, companies may be stymied in their hiring because the cap on H-1B visas is reached early in the fiscal year, necessitating a longer-than-expected delay in hiring an H-1B visa holder until the start of the next fiscal year.)

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Building a Workforce for the Information Economy 5.4 INTERACTION BETWEEN THE USE OF FOREIGN WORKERS AND LOCATING WORK OFFSHORE The previous two sections describe the domestic use of foreign workers and location of work offshore as though they were alternatives to each other. In some cases, they are—if the benefits of using foreign labor outweigh its costs, a domestic absence of foreign workers will inevitably lead to location of work abroad. On the other hand, the use of foreign workers can complement the location of work offshore. As described in Box 5.4, a U.S. firm may contract for IT work with a foreign IT company with a U.S. subsidiary that serves as a domestic interface to the U.S. firm. (The same argument could apply as well to a stand-alone U.S. corporate entity with close corporate and personal ties to the foreign work performer.) Given the requirements for close communication with the work-performing firm, the workers for the U.S. company serving as interface are likely to be foreign workers from the country in which the work performer is located—and they are most likely to be brought to the United States on H-1B or L-1 visas.47 This arrangement puts pressure on wages for domestic workers, but for an entirely different reason than that offered by most H-1B critics. Compared to domestic work performers who could do the same job, it can take advantage of a lower wage structure (i.e., that of certain foreign nations such as India or Taiwan) for the entire project. This is likely to provide the foreign work-performing firm with a cost advantage that domestic work performers will be hard-pressed to beat. Thus, to the extent that foreign firms are more attractive to U.S. firms with work to outsource, they take away work from domestic work performers, with all of the wage consequences that that implies (Box 5.8). Note also that the same wage considerations apply when the U.S. company establishes a foreign subsidiary, even if it has done so for reasons entirely unrelated to labor costs. The use of foreign labor versus location of work abroad cannot always be reduced to a simple choice between the two possibilities. Employers understanding the complexity of these issues are likely to make choices 47   Note that the use of L-1 visas is small compared to the use of H-1B visas. One important reason is that an L-1 visa requires the visa holder to be an incumbent employee of the company that wishes to transfer him or her to the United States.

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Building a Workforce for the Information Economy BOX 5.8 Labor Cost Savings Using Foreign Labor A simple model will quantify the difference in the cost of using domestic versus foreign labor. Assume that 10 percent of a project 's personnel are needed to provide the interface, and the other 90 percent do the implementation. For simplicity, assume that all personnel are paid the same amount (X). Compare three situations. Situation A: Both the interface personnel and the implementers are domestic workers. In this case, the labor cost per person of the project is 0.1 X + 0.9 X. (If the interface personnel are H-1B visa holders and are paid the prevailing wage. in accordance with the law, the use of H-1B workers is cost-neutral.) Situation B: The interface personnel are underpaid H-1B visa holders and the implementers are domestic workers. Various reports assert that H-1B workers are paid significantly less than U.S. workers for the same jobs, thus saving their employers significant amounts in labor cost; for the sake of argument, assume that they are paid 30 percent less than the wages paid domestic workers (a difference claimed by some H-1B critics). In this case, the labor cost per person of the project is (0.1)(0.7) X + 0.9 X. Situation C: The interface personnel are domestic workers (or H-1B workers paid the prevailing wage) and the implementers are foreign workers working in their native land, and paid the prevailing wages there. Various reports place comparable salaries at a factor of 3 lower than in the United States and often even lower. Assuming a factor of 3, the labor cost per person of the project for Situation C is 0.1 X + (0.9) (1/3) X. Comparing Situation B to A, it is clear that the labor cost of Situation B is 97 percent that of Situation A. But the cost of Situation C is 40 percent of the cost of Situation A. The inevitable conclusion is that all else being equal, savings in H-1B labor costs due to the alleged exploitation of U.S. employers would be overwhelmed by the savings due to the use of foreign labor working in their native lands. that reflect the mix of work they wish to locate abroad versus that which they wish to keep within the United States, as well as their judgments of the benefits (e.g., better access to local markets or significantly reduced labor costs) and costs (e.g., reduced and inhibited communication). 5.5 RECAP For purposes of this report, foreign workers are foreign-born individuals who are either temporary nonimmigrant workers or permanent residents of the United States. Foreign-born individuals (including both

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Building a Workforce for the Information Economy foreign workers and naturalized U.S. citizens) constituted about 17 percent of the Category 1 IT workforce in 1998, compared to about 10 percent of the total U.S. population. The committee estimates that temporary nonimmigrant workers (mostly with H-1B visas) constitute about 10 percent of the Category 1 IT workforce, although this figure likely represents an upper bound. Because the United States does not have a monopoly on productive, knowledgeable, and motivated individuals, U.S. employers seek talent from around the world. The critical feature of the H-1B program is that it enables employers to hire qualified foreign workers in a matter of months, in contrast to the years required to attract and train additional U.S. students or to obtain green cards for prospective permanent residents. The committee believes that foreign Category 1 and Category 2 IT workers—including the H-1B visa holders—can make positive contributions in a number of ways to the U.S. IT sector, IT-intensive firms, and the economy as a whole. For example, while H-1B visa holders are far from the dominant influence on the IT workforce, their number is large enough that without these workers there would likely be a slowdown in the rate of growth in the IT sector. At the same time, economic theory implies that an increase in the supply of IT workers, including temporary nonimmigrant workers, will cause the corresponding IT wage rates to be lower than they otherwise would have been. Theory alone does not imply any particular numerical magnitude of this effect. It is the committee's judgment that the current size of the H-1B workforce relative to the overall Category 1 IT workforce is large enough to exert a nonnegligible moderating force that keeps wages from rising as fast as might be expected in a tight labor market. Finally, in light of the controversy over the level of the H-1B cap, the committee has found no analytical basis for determining the optimal level of such visas, and decisions to reduce or increase the cap on H-1B visas are fundamentally political. However, an increased number of H-1B visas is likely to result in future additional pressure on the permanent immigration program unless Congress also adjusts the various numerical limits on permanent residents.