Understanding Theory: Labor Market Edition

Recently, the Trump Administration revealed that a new fee of $100,000 would be imposed on H-1B applications, in addition to existing fees and potential legal charges. The H-1B visa permits companies to recruit foreign professionals with college degrees. Organizations enter a lottery system, and those who are selected can then employ foreign talent. This visa can transition into a green card down the line. Notably, universities are exempt from the lottery, making it a pathway for international students to remain in the U.S. after completing their studies. This discussion centers more on the implications of this fee rather than the fee itself.

The rationale provided by the Trump administration is that this fee aims to deter companies from relying on cheaper foreign labor at the expense of domestic workers. Although the structure of the H-1B program suggests otherwise, we’ll accept the administration’s argument for the sake of this discussion.

Will this additional fee encourage the hiring of American employees? It’s a tempting assumption. After all, as the cost for foreign workers increases, it stands to reason that businesses may reduce their reliance on them. This aligns with the law of demand: as prices rise, the quantity demanded tends to decline.

However, there exists an underlying premise in the argument from the Trump administration: namely, that domestic workers are inherently the next best alternative to foreign workers. This is not an absolute certainty. The law of demand indicates that businesses will adjust their hiring practices, but it does not specify how they will do so. They may decide to fill positions with American workers due to the now relatively lower cost of domestic labor, or they could potentially alter their business operations or even move abroad entirely.

The law of demand suggests that a rise in price will lead to a decrease in quantity demanded, assuming all other factors remain constant. Economic theory informs us that behavior will adapt to shifts in relative prices. Yet, it does not predict the specific methods of that adjustment. The outcomes will depend on the choices available to firms and individuals at that moment and their specific goals. What those alternatives are will be influenced by the unique circumstances of time and place they are navigating.

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