Bill Gates reportedly told the US Congress last week that his country should welcome as many foreign professionals as possible. The way to solve the “critical shortage” of hi-tech workers in the US, he said, was to “open our doors to highly talented scientists and engineers who want to live, work and pay taxes here.”
I find this an intriguing possibility because of the potential repercussions for both the Indian and American economies.
The H1B visa programme controls the inflow of skilled workers into the US. The current annual limit is 65,000, though it was as high as 1,95,000 at the height of the dotcom boom. What could happen if this rationing system is abolished, and skilled hi-tech workers get open access to the US labour market?
Let’s say a million Indians move to the US, in case anybody out there takes Gates’ suggestion seriously. The increased supply of professionals who can write software or design semiconductors or invent new drugs will immediately pull down the wages of American technology workers. Good news for Microsoft, for sure.
And what happens in India? The shortage of skilled workers here will worsen and their wages would rise even faster than they do now.
Harvard economist Greg Mankiw writes in his blog that a free flow of skilled people from countries like India to the US could impact income inequality in the two countries as well. Inequality in the US would reduce as the wages of the skilled fall in relation to the wages of the unskilled. “… from a US perspective, the economic pie grows larger, and the slices are divided more equally. More efficiency and more equality—a rare twofer,” says Mankiw.
And the very opposite will take place in India: Inequality will rise as the wages of the skilled rise faster than the wages of the unskilled. “Allowing more skilled workers into the US might exacerbate global inequality, even if it enhances global efficiency,” says Mankiw.
Mankiw’s comments have sparked off a huge debate on the blog. “India will benefit if the US produces better products at cheaper prices. If an Indian worker’s most productive possible job is in the US, India should in fact gain from the worker’s relocation. Of course, if we count lost tax dollars as part of India’s loss, then yes, India may lose from our gain. However, that turns our limits on immigration into a highly inefficient foreign aid programme from American government to Indian government, at the additional expense of American companies and Indian workers. It’s a dubious case at best,” says Bastiat, one of those who have replied to Mankiw.
Or, here is what someone who calls himself Editor Theorist, adds: “Would it not be logical (and desirable) that the US skilled workers whose income is damaged by skilled worker immigration reverse migrate to those countries from which the US immigrants came? The simplified example I was thinking of was mathematics professors—the best Indians would go to US universities (the best in the world), and the US math professors they displaced would go to Indian universities.”
My own question is: What could free movement of skilled workers mean for the Indian outsourcing industry? The normal assumption is that more H1B visas are good news for our software shops, since they can send more engineers onsite to solve client problems.
But are we mistaken in making such an assumption?
Most outsourcing works on a simple principle—either the work moves or the worker moves. The restrictions on worker movement are one reason that work has moved to places such as Bangalore, Pune and Gurgaon. So, will the freeing of restrictions on worker movement mean that less work will come India’s way?
Consider another example. The UK has recently changed its immigration rules for skilled workers to encourage EU citizens to move there. Desi doctors in the UK have gone to court, and up to 25,000 Indian doctors who are currently in the UK could be forced to come back to India in case their lobby loses the case.
The return of these doctors could push down the earnings of doctors here. Indian medical services could get even cheaper, which is a further incentive for patients from rich countries to fly down to have their bodies repaired.
Once again, the flow of people across national borders could either harm or hinder outsourcing. So, taking off from the question asked by Bastiat on Mankiw’s blog, are the restrictions on immigration actually a hidden subsidy for our outsourcing industry?
I have my doubts, which I shall write about in the coming weeks. Meanwhile, I welcome readers to join the debate.
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