Lets talk about the H1-B Visa
In light of the recent executive order issued by President Trump to ban nationals from 7 Muslim majority countries from entering US, there has been some discussions on whether H1-B is his next target.
In this article, I will articulate the drawbacks of the current H1-B visa program and why it is in need of reform — which will benefit both the American workers as well as attract good talent from rest of the world.
Background
Currently, US issues 65,000 H1-B visas every year. Additionally, there are 20,000 H1-B visas reserved for graduates who have completed their Masters from a US university. If the visas get oversubscribed (as has routinely been happening for the past 3 years; last year there were 236k applications for 85k visas), a lottery takes place to determine which candidates get the visa.
How IT outsourcing companies game H1-B visa application process
If you look at the top companies who sponsor the H1-B visa, you will notice that they almost exclusively consist of IT outsourcing firms — all of whom are based out of India. Don’t read too much into IBM, Accenture, CapGemini as being American companies — all of them have very large bases in India and they use H1 visa to get low cost Indian workers on the client side in US. According to some stats, Indian IT outsourcing companies secure 65% of 65k visas which are available.
The current lottery system heavily favors those companies who are able to apply for large number of visas in one go.
Lets look at the math:
Say Tata Consultancy Services (TCS) files for 13k visas for in 2016. If the total number of applications were 236k, then the expected number of visas TCS is going to get is (using probability) => (13,000/236,000)*65,000 = 3,580 visas
Similarly, let us say a startup is filing for an H1-B for 1 of their employees. Their expected probability of securing the visa is => 1/236000*65000=0.27
As you can see, the current lottery system favors the company which applies for the most number of visas. IT outsourcing companies have figured this out and apply for H1-B visas en masse in the hope to secure the largest amount of visas. And since, generally, these outsourcing companies pay less than the market rate to Indian employees who come to US, they have a cost differentiated advantage against their US counterparts — hence the more visas they can secure the better. Lastly, it is unclear whether the H1-B visa holders who come via this route are indeed the best and brightest who US wants to attract (which is the purported reason behind the existence of this visa) vs. people with untested intellect/skills looking to make a quick buck while they are in US working on the client side.
Other issues with the current state of H1-B visa
The current system really hurts the smaller companies (such as startups) — and their employees — who are able to pay market rate but because of the vagaries of the lottery system, have only around 25% probability (see math above) to secure visas for their new employees.
The current system also hurts recent international graduates (both undergrads and grads) who have no guarantee that they will secure a visa once they leave college, even if they secure lucrative jobs. Though the 20,000 H1-Bs reserved for graduates with Masters degree helps, those too get filled out fast (on the first day the lottery opens) thus leaving the rest of them facing the prospect of going back home often with large student debts. This uncertainty also has longer effects as potentially talented students, who may be looking to come to US for further studies, may think twice (and choose another country to pursue their higher studies) before coming.
What is working?
Despite the drawbacks, the current H1-B system does have some good things going for it:
- Students who graduate with STEM degrees (Science, Technology, Engineering and Mathematics) get a 36 month of OPT (Optional Practical Training) extension after their graduation. What this means is that STEM degree graduates can work unfettered (on their F-1 education visa) for a period of 36 months — thus giving them 3 shots at filing the H1-B visa. This provision provides great comfort to potential students of STEM degrees when considering US as a potential option to pursue their higher studies — thus also helping US attract some of the best science and engineering graduates from around the globe.
- Recently, Obama administration also passed a directive to allow the spouses of H1-B visa to apply for employment authorization (or the ability to work at any place). This is a great move as it again encourages more talented people, who are married, to come to US given their spouses will have the option to work at the company of their choice (vs. just sitting at home or asking their would be employers to apply for their H1-B and going through the uncertainties of the lottery process). Note that L-1 visa (which enables companies to internally transfer employees from an international location to US) always had this provision — so extending it to H1-B was natural and the right thing to do.
Suggestions for Improvement
It is clear that the H1-B visa is in need of reform to unshackle it from the exploitation by IT outsourcing companies. Here are a few suggestions on how it can be improved:
- Scrap the lottery system where it is clear that IT outsourcing companies — who apply for visas in bulk — are gaming it.
- Prioritize allocation of H1-B visas to students who have come to US for their 2 year or 4 year education. This will ensure that all students who come to US and are capable of securing jobs can do that without being exposed to the vagaries of the lottery system. Also, it will remove the uncertainty in the minds of potential students considering US for higher studies — thus enabling US to attract strong talent from across the globe.
- Establish a new class of visas for employees who will be working on the “client-side” on behalf of their (outsourcing) company. The goal here is to differentiate between companies who want to court international employees to work for them vs. those companies who send workers temporarily as “client side” agents to provide services to another company. Limit the number of visas in this category to 10,000 and keep the application fee very high (>$5,000) and increase it depending on number of visas applied for. Train visa agents to aggressively push IT outsourcing employees to use this visa category vs. H1-B.
The last suggestion could be controversial and may not entirely solve for replacement of American workers with (less expensive) international ones but hopefully by limiting the number of visas to 10,000 per year with high (and increasing) application fees, the issue could be mitigated. However, I agree that enforcing this will not be easy and maybe the pitfall here.
I am not a big fan of Senator Issa’s bill to reform H1-B visa which increases the salary threshold to $100k from the current $60k. While that works for engineers or traders (who generally command good salaries), H1-B is supposed to be a more holistic visa which should also work for a fashion designer or a marketing manager — and they will not be able to earn $100k in their professions from the get go. Also, it is difficult to imagine how international non STEM bachelor students at top undergrad universities can command $100k as their starting salaries and we risk losing these students as part of this reform. This is why I feel there should be another category of visas for “outsourcing companies” (where such salary thresholds may make sense) vs. trying to mold the H1-B visa to fit all the different use cases.
Conclusion
Hopefully, this article gave you some idea of the pitfalls of the current H1 visa system, how IT outsourcing companies are exploiting it, as well as why a reform, though needed, is not as straightforward as one might think.
