Slate covers Senior Fellow Michael Clemens' work on immigration and wage differentials.
Software developers in the United States earn more than software developers in India. A lot more. One 2008 study showed that U.S. developers earned about $71,000 more per year on average than Indians. Adjust for the purchasing power gap differential and the gap narrows a bit but remains large at $62,240. This differential could, in principle, arise for all sorts of different reasons. But a paper presented by Michael Clemens of the Center for Global Development at this year’s American Economic Association conference offers provocative evidence that the main reason is inherently tied to place: The exact same high-tech workers could be creating much more value if they were allowed to relocate to the United States.
This should be a bit surprising. In many fields, it’s clear why migrants can increase their earnings by coming to the United States. A maid or a dishwasher has higher productivity in the United States than in Mexico or El Salvador because U.S. consumers are richer and can afford to pay more. Immigrants don’t get any better at cleaning stuff—they become more effective in selling their skills to clients with money to pay.
But we would expect to see those effects overwhelmingly concentrated in what economists call nontradable sectors. People earn more by crossing borders when the stuff they produce—haircuts, health care, restaurant meals—can’t travel. But computer work is a quintessential tradable good. Easy as it is to ship many classes of physical goods across continents, it’s much easier to move software. So you might think the difference in compensation between American and Indian programmers overwhelmingly reflects differences in skills. Even if Indian-born programmers in the United States earn more, that might simply reflect the shortage of H-1B visas. Perhaps it’s just that India’s best programmers are disproportionately likely to come here.
Clemens discovered a crucial natural experiment that lets us test that hypothesis and provides evidence that it’s badly wrong. In his paper, “Why Do High-Tech Workers Earn More in Houston Than Hyderabad?” Clemens explains that, thanks to a quirk in the process, H-1B visas for engineers were handed out based on a pure lottery system in 2007 and 2008. No selection effect whatsoever was at work. Indeed, working with a company he calls “Anaamika Systems” that provides IT services for other businesses, Clemens verifies that there are no identifiable differences between the workers they sponsored for visas who didn’t get them and those who won the lottery. No difference, that is, except in terms of how much money they made. Anaamika’s clients were willing to pay a $55,000 to $58,000 premium to have work performed on-site in the United States rather than remotely in India, leading to a roughly sixfold increase in earnings.