Trump’s $100,000 H-1B fee is flawed—and risking American jobs
The US President’s sharply hiked visa fee is meant to protect American jobs, but a deeper look at the economic forces at play suggests it's a profound gamble that could backfire badly. On the other hand, it could be a blessing in disguise for India's tech sector.
US President Donald Trump’s dramatic H-1B visa fee increase to $100,000 isn’t just a political statement; it’s a profoundly flawed economic manoeuvre. While it may seem like a straightforward way to ‘protect’ American jobs, a dive into the principles of production and labour economics reveals it to be a misplaced policy that risks hurting the very economy it aims to help. The problem with it is that it only considers the price of labour, completely ignoring its productivity.
For a business, an optimal production strategy is determined by two key factors: the cost of inputs and their respective productivity. This is captured by the economic principle that a firm is at its most efficient when the ‘marginal rate of technical substitution’ (MRTS or the rate at which one input can be swapped for another while keeping output constant) is equal to the ratio of their prices. In turn, the MRTS should be equal to the ratio of the marginal productivity of these inputs.
Trump’s policy is a heavy-handed attempt to manipulate the price ratio between labour working on H-1B visas and local labour. By making the cost of H-1B labour exorbitantly high, the new US visa policy aims to make domestic American labour a cheaper and thus more attractive alternative. The touted logic is that this will force companies to hire more Americans.
However, this logic is incomplete. The policy completely ignores the marginal productivity of the two labour types. The ‘marginal product’ of labour is the additional output gained from hiring one more worker. It is a crucial measure of a worker’s value to a firm. A rational company will only hire another worker if the marginal product justifies the cost.
The US policy’s fatal flaw lies in its assumption that H-1B visa holders and domestic workers are perfectly interchangeable, or that the productivity of a US worker is always equal to or greater than that of a foreign worker.
This is far from the reality of today’s modern economy. America’s H-1B programme is often used to bring in foreign workers with highly specialized skills that are in short supply in the US. In many cases, the marginal productivity of an H-1B visa holder is immense because her skills are unique and critical to a project.
In effect, the policy essentially says, ‘Pay a six-figure tax for this essential skill or don’t get it at all.’ For a company that cannot find a domestic alternative, the result isn’t more American jobs; it’s lost innovation and reduced competitiveness.
Moreover, for a firm that has already hired many domestic workers, the marginal productivity of further US recruits may decline. Bringing in foreign workers with different skill-sets or fresh perspectives can result in a massive productivity boost. The policy ignores this by creating an artificial price barrier, forcing US firms into a situation where their production is less efficient.
By targeting the price of H-1B labour without any consideration for its productivity, the policy forces firms to operate at a suboptimal level. They cannot achieve a cost-minimizing equilibrium because the price of one of their essential inputs has been artificially and unrealistically inflated.
The consequences of this economically myopic policy are predictable and perverse. Instead of laying the ground for the substitution of foreign labour with American workers, it will trigger a global redistribution of work and talent.
Faced with the prohibitive visa fee when the next H-1B ‘lottery’ is held, many companies will find it more cost-effective to simply move projects out of the US. Why pay an exorbitant fee for an on-site worker when the same work can be done by a team in India, Canada or Europe at a fraction of the cost? This could lead to an accelerated offshoring trend, directly exporting jobs from the US and hurting its economy.
For India, this policy is a blessing in disguise. Skilled Indian professionals, who have grown weary of US visa uncertainty, will have a powerful new incentive to stay home or return. An influx of returning talent with international experience could step up the growth of India’s startup ecosystem, helping new businesses mature faster and tackle complex challenges in areas like AI, biotech and fintech.
This is not a story about whether foreign workers ‘steal’ jobs. It’s about a policy that misreads the fundamental principles of economics and the nature of the global economy. By imposing a steep financial penalty on highly productive foreign labour, the US risks undermining its own innovation and competitiveness.
Put differently, the MRTS framework shows us that this isn’t just a debate over jobs for locals versus immigrants. It is about what gets substituted, how fast and at what cost. Push too hard on one input and the production frontier itself may shrink.
In its one-dimensional focus on price, Trump’s approach is trying to win a chess game by moving only pawns. This may appear strategic, but is blind to the far more important pieces on the board—the skills, productivity and global mobility of talent. Ultimately, it is a self-inflicted wound that may not only fail to protect American jobs, but actively drive jobs away.
These are the author’s personal views.
The author is professor, economics and executive director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR.
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