Sunday, June 29, 2014

29/6/2014: Tech & Science Migrants & Native Workers: US Evidence


Tech specialists and ICT specialists hired from abroad into countries like Ireland are seen, by the policymakers, as a necessary and sufficient evidence of growth in employment and domestic economic well-being. The reason for this is often found the argument that lack of local skills will result in higher labour costs and lower competitiveness of the sector and, thus, lead to outflow of ICT-linked FDI and reduced MNCs activity in the economy.

Part of this rationale is correct. Part is wrong. I recently posited, in my Sunday Times ex-column and in a WSJ op-ed, the thesis that in Ireland's case, tax optimisation by ICT MNCs is equivalent to a resource curse, whereby excessive amounts of financial resources flows into attracting and retaining skilled workers, resulting in underinvestment in other sectors of economy. Beyond this, the Government, grown accustomed to windfall revenues from the tax optimising MNCs has lower incentives to focus on developing indigenous and highly competitive specialisation.

Setting aside these more complex arguments, what is the effect of the skilled ICT and tech and R&D workers immigration on domestic economy?

Peri, Giovanni and Shih, Kevin Yang and Sparber, Chad, in their recent paper titled "Foreign Stem Workers and Native Wages and Employment in U.S. Cities" (May 2014, NBER Working Paper No. w20093) looked at the effects of the Scientists, Technology professionals, Engineers, and Mathematicians (STEM workers) immigration into the US. Per authors, STEM workers "are fundamental inputs in scientific innovation and technological adoption, the main drivers of productivity growth in the U.S."

In their paper, the authors attempt to "identify the effect of STEM worker growth on the wages and employment of college and non-college educated native workers in 219 U.S. cities from 1990 to 2010. In order to identify a supply-driven and heterogeneous increase in STEM workers across U.S. cities, we use the distribution of foreign-born STEM workers in 1980 and exploit the introduction and variation of the H-1B visa program granting entry to foreign-born college educated (mainly STEM) workers."

Key findings:

  • "We find that H-1B-driven increases in STEM workers in a city were associated with significant increases in wages paid to college educated natives." In other words, shortages of specialist skills (signified by intensity of inflow of STEM migrants) do bid up wages for similarly-educated (in degree attainment and also in skills similarities) natives. This agrees with my argument that far from driving down labour costs for skilled workers not just in STEM-related sectors, but across all educated workforce, STEM-targeted immigration is associated with higher labour costs. Often, this is seen as being driven by complementarity between STEM skills and related services professionals (legals, accounting, sales, marketing, etc). But is that the case of signalling value of their degrees going up in the market, or is it the case of their skills value going up? One way or the other, more STEM immigrants seems to do nothing to improve labour costs competitiveness.
  • "Wage increases for non-college educated natives are smaller but still significant." So wage inflation is not moderated by STEM migration, even if we control for skills. In other words, all sectors of city economy are facing rising costs in the presence of STEM immigration. This, of course, is not an argument of causality, but it is also not the evidence that would be consistent with an argument that STEM immigration induces gains in labour competitiveness.
  • "We do not find significant effects on employment." In other words, jobs creation is not what happens when you open up targeted skills-driven migration. And, by converse, it is not impacted by restricting it. Which begs a question: every month Irish ministers present jobs announcements by STEM-intensive ICT services companies as evidence of employment creation. Every time they do so, they omit consideration of what higher cost of skilled and unskilled workers is doing to the rest of the economy. Should they be concerned with the latter at least as much as with the former? The study evidence suggests they should.
  • "We also find that STEM workers increased housing rents for college graduates, which eroded part of their wage gains." Ah, can that be a reason why rents are inflating in Dublin, especially in the areas where STEM-equivalent skills are at the highest premium (IFSC and South Docklands corridor)? In summary, therefore, higher employment and immigration of STEM workers seems to be associated with higher costs of living for all workers. Is it correct to posit a question of spillovers or externalities that arise from greater share of new employment going to skilled ICT immigrants onto the long term residents of the country or city? If yes, then the logic suggests that there should be consideration of transfers from the immigrants under STEM programme to at least those natives and long term residents who do not gain in wages enough to compensate them for the rising cost of living.

Overall, authors conclude that "Together, these results imply a significant effect of foreign STEM on total factor productivity growth in the average US city between 1990 and 2010." Which is, of course, good. But it does not tell us if this TFP growth actually spreads across the entire economy or stays within STEM-intensive sectors. We do not know if TFP gains in STEM sectors are not offset by labour competitiveness losses in the rest of the host economy. And, crucially, it does not tell us if the above questions, posited in the bullet point comments, can be answered unambiguously in favour of more STEM-linked immigration.

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