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Market-Based Solutions to Vital Economic Issues
Kenan Insight
Jan 19, 2023

How Labor Mobility Affects the Economy and Workers

An empowered workforce can take many forms. While labor’s strength is typically discussed in terms of bargaining power and the ability to negotiate for higher compensation or more benefits, other considerations affect a worker’s leverage in the broader labor market. One such consideration is worker mobility, or the ability of a worker to move across jobs, firms or industries. An increase in worker mobility implies more freedom for workers to move to a new form of employment as they see fit, as well as a broader palette of options available to those in the workforce.

A number of theoretical models in economics position labor and capital as opposing forces at the bargaining table, locked in a struggle for control of the resources that the economy generates. According to this line of thought, a more empowered workforce would be a negative for capital and firm owners. However, recent research from Abhinav Gupta, UNC Kenan-Flagler Business School assistant professor of finance, demonstrates that the situation is actually far more nuanced – and lower worker freedom may benefit certain types of firms at the expense of others.

In the paper, Gupta explores how interfirm labor mobility, or the ability of workers to move between firms, affects both startups and incumbent or established firms. Broadly speaking, decreased labor mobility harms startups and helps incumbent firms. In addition, entrepreneurship and the formation of new firms decrease with worker mobility.

Additionally, this paper’s findings offer implications that extend beyond theoretical conceptions of labor mobility. Gupta exploits a 2005 change in green-card requirements to analyze labor mobility. While his work offers evidence of the importance of worker mobility for business dynamism, it also demonstrates the significant role immigrant labor plays in furthering entrepreneurship.

The Natural Experiment: An Unexpected Shock to the Green-Card Process

The United States issues green cards to show that immigrants have permanent legal status, but it caps the number of green cards that can be issued to immigrants from a given country at 9,800 each year. Countries such as China and India have far higher numbers of immigrants to the United States, resulting in wait lines from these countries.

An unexpected change – specifically, to the third and final stage of the process, referred to as Adjustment of Status – occurred in October 2005, creating the conditions for the natural experiment used by the paper. Progressing to this stage is particularly freeing for immigrant workers whose immigration status is contingent on maintaining employment. Applicants who have applied for Adjustment of Status can switch to other firms or jobs in the same industry 180 days after completing this step, even while awaiting green-card issuance, without endangering their immigration status.

Before 2005, the cap was applied only after the Adjustment of Status stage, meaning that green-card applicants could progress through this stage – and enjoy the greater labor mobility afforded by applying for Adjustment of Status. However, in 2005, the country cap was moved to the Adjustment of Status stage, meaning that only 9,800 applicants from a given country could apply for Adjustment of Status annually. For high-immigration countries China and India, wait times to apply for this stage jumped as high as five to seven years. Subsequently, the change negatively impacted labor mobility, as workers who chose to switch employers would go back to the end of the application line.

Differential Impacts on Startup and Incumbent Firms

The change thus drastically decreased worker mobility for immigrant workers from high-immigration countries, who had to stay with their employers until they could apply for Adjustment of Status – or else lose their place in line. Gupta then uses LinkedIn data to show that this decreased labor mobility led to far fewer immigrants from these countries taking jobs at startups. The logic behind this change is simple: Startup companies face higher rates of failure than incumbent firms. For immigrant employees working at startups, the firm’s failure endangers their green card status, since they no longer have a viable employer sponsoring their citizenship. Working at a startup thus became a riskier bet for immigrant workers, who could face deportation if they lost their jobs.

The green-card policy shock lowered the incidence of immigrant workers in startups, reducing the pool of labor for startups and leading to fewer new firms in the markets with higher proportions of Indian and Chinese immigrants. Between 2006 and 2010, there were 12,000 fewer startups in markets with more Indian and Chinese immigrants, translating to a 1.2% decline in new firm formation. Startups with Indian and Chinese co-founders, thought to be more dependent on co-ethnic labor, also saw a decrease of a half percentage point in venture capital investment compared with others after the process change. By contrast, stock prices for incumbent firms with high proportions of Indian and Chinese workers outperformed the market in the 10 days after the announcement of the green-card process change.

Worker Mobility as a Channel for Business Dynamism and Efficient Labor Markets

Figure 1: Differential Impacts to Incumbent and Startup Firms 1

Labor Markets

The paper’s findings indicate that a more empowered workforce (in the form of greater worker mobility) benefits a country’s economy by fostering a more dynamic business environment. As workers are better able to move between various forms of employment, startup firms gain access to a wider pool of skilled labor. New firm formation also increases, as does entrepreneurship. Together, this evidence points to the idea that for entrepreneurs to develop new ideas and products, they need to rely on a mobile workforce that can safely move between firms.

Secondary findings in the paper also point to the role worker mobility plays in fostering an efficient and equitable labor market. Gupta finds that the 2005 shock negatively affected both wages and promotions for Chinese and Indian workers at large incumbent firms. Post-2005, these incumbent firms had a tighter hold on immigrant employees from these countries, since any move away from these firms would endanger or prolong these individuals’ green-card applications. Gupta’s data shows a 13% decline in promotions within firms for Chinese and Indian employees after the 2005 shock. Given that more than a million workers are affected by these restrictions2, worker mobility plays an essential role in ensuring that employees are justly compensated for their labor.

Findings in Context: The Tech Sector, Immigration and the 2022 Slowdown

Much of the research at the intersection of immigration and labor focuses on entry restrictions, or else on how immigration affects labor market conditions for other workers native to the destination country. Importantly, Gupta’s work demonstrates that even after receiving entry into the United States and becoming a part of its workforce, immigrants face significant barriers that hamper both their personal freedom and ability to contribute economically.

These findings hold special importance considering the tech slowdown that began at the end of 2022 and continues into 2023. After more than a decade of explosive growth in the sector – and a pandemic-induced shift to remote work that caused even more expansion – layoffs and hiring freezes have befallen many giants in the technology and software space. Even those companies that have traditionally demonstrated strong resilience during economic hardship, such as Google and Apple, have suffered in recent months, resulting in roughly 150,000 layoffs in the tech sector in 2022 alone.3

The tech industry is notable for having high proportions of high-skilled immigrant workers, particularly from countries with a high volume of immigrants such as India and China. This slowdown has been especially detrimental to green-card workers waiting to apply for Adjustment of Status, many of whom spent years at specific companies but remain unable to change firms. For immigrant workers on an H-1B visa, a layoff means they have 60 days to find new employment or else risk deportation.

Given the significant role immigrant workers have played in furthering technological innovation in the United States, this is hardly an equitable situation, nor is it good for the economy. A 2018 paper indicates that immigrant-owned firms outperform native-owned firms in the U.S. on 24 out of 26 types of innovation, including product innovation and R&D.4 A separate paper from the same year demonstrates that foreign-born workers generate a quarter of the aggregated economic value created by patents produced by publicly traded firms in the U.S.5

The takeaways from this paper are thus key to understanding the technology sector, as well as any other sector with a high reliance on workers from other countries. Policies that reduce immigrant labor mobility negatively impact entrepreneurship and the creation of new enterprise. Conversely, such policies also allow established firms to dominate the labor market and reduce immigrant worker promotions, resulting in higher stock market returns. Most importantly, these restrictions create a precarious situation for immigrant workers unable to change firms, who are then made increasingly vulnerable to any economic downturn that might affect their employer.

This piece was written by Kenan Institute Technical Business Writer Thomas Nath.

1 Gupta, A. (2022). Labor Mobility, Entrepreneurship, and Firm Monopsony: Evidence from Immigration Wait-Lines. Available at: https://www.abhinav-gupta.net/research

2 Bier, D. (2020). Backlog for Skilled Immigrants Tops 1 Million: Over 200,000 Indians Could Die of Old Age While Awaiting Green Cards. Cato Institute, Immigration Research and Policy Brief No. 18. https://ssrn.com/abstract=3567152

3 Jordan, M. (2022, December 9). Tech Layoffs in U.S. Send Foreign Workers Scrambling to Find New Jobs. New York Times. https://www.nytimes.com/2022/12/09/us/tech-immigrant-workers-visas.html

4 Brown, J. D., Earle, J. S., Kim, M. J., and Lee, K. M. (2018). Immigrant entrepreneurs and innovation in the U.S. high-tech sector. In I. Ganguli, S. Kahn, & M. MacGarvie (Eds.), The Role of Immigrants and Foreign Students in Science, Innovation, and Entrepreneurship. Chicago, IL: University of Chicago Press. Retrieved from https://www.nber.org/chapters/c14103

5 Bernstein, S., Diamond, R., McQuade, T., & Pousada, B. (2018). The contribution of high-skilled immigrants to innovation in the United States. https://www.gsb.stanford.edu/faculty-research/working-papers/contribution-high-skilled-immigrants-innovation-united-states

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