The Case for Loosening Closed-Visa Programs

To fill jobs in sectors experiencing local labor shortages, some countries—including Canada, New Zealand, South Korea, and the United States—offer closed-visa programs that tie foreign workers to a single employer for a fixed term.

These programs provide opportunities, but they also limit foreign workers’ prospects by restricting their mobility, lessening their bargaining power, and repressing their wages, argues research from University of Toronto’s Kory Kroft, University of Chicago PhD student Isaac Norwich, Chicago Booth’s Matthew J. Notowidigdo, and Toronto Metropolitan University’s Stephen Tino. Providing these workers with an easier pathway to permanent residency would improve their career opportunities and increase their earnings, the study suggests.

The researchers focused on Canada and its Temporary Foreign Worker Program. Labor-rights organizations have criticized the program, saying that it can enable the exploitation of workers, particularly low earners. Changing employers is technically possible, but it’s an arduous process. And if fixed-term workers want to remain in Canada once their initial stay is up, they face another difficult process to renew their work permit or obtain a new one.

The criticism has merit, the study suggests. The researchers analyzed data about temporary workers who arrived in Canada between 2004 and 2014. They linked visa records for approximately 200,000 workers to the Canadian Employer-Employee Dynamics Database, which holds extensive information on companies, employees, and earnings.

The analysis compared cohorts of immigrants who arrived at different times and took between three and five years to transition from temporary visas to permanent residency. These workers found roles in a variety of industries including construction, manufacturing, retail, technology, and landscaping.

Three years after gaining permanent residency, temporary workers had earnings that were 6 percent higher than before, the researchers find. That may have been due to better job mobility, as the workers’ job-switching rate increased by 22 percentage points. The probability of switching industries, which can help lower-skilled workers gain better experience and pay, rose by 12 percentage points. Workers moved to businesses that tended to have significantly higher revenues and pay employees more.

Lower-wage workers—many of whom came from lower-income countries—were particularly helped. Their earnings rose by 12 percent, on average, compared with 2 percent for higher-skilled workers.

Using an economic model to extrapolate the effects of permanent residency over 15 years, the researchers estimate the overall earnings increase to be 50 percent higher than the three-year effects for all workers.

They also used their model to assess two proposed policy changes in Canada. One would give businesses a stronger incentive to hire Canadian workers and permanent residents by increasing the application costs for companies hiring temporary foreign workers.

If these costs (typically about C$1,000 per hire) were to rise by 25 percent, companies would hire fewer temporary foreign workers, the research finds. The model predicts that earnings for a portion of the domestic workforce would rise, pay for temporary foreign workers would fall, and the profits of companies that hire the latter would decrease by about 2 percent, in part because more positions would remain vacant.

The other policy, put forward in Parliament, would allow all temporary foreign workers to more easily switch jobs within their own industries. In this case, the research suggests that these workers’ wages would rise, with lower-wage foreign workers benefiting the most. But wages for the domestic workforce vying for the same positions would fall due to increased competition.

Notowidigdo says that this points to a fundamental trade-off that policymakers have to consider: “While open visas can grow the total economic pie, the policy may reduce wages for the small subgroup of domestic workers who are competing for the same jobs,” he explains.

But even after accounting for that, and for payments made to foreign workers, the benefits outweigh the costs, Notowidigdo says. Creating a smoother pathway to permanent residency has the “efficiency-enhancing effect of foreign workers having an easier time finding the firms that can make the best use of their skills,” he notes. Companies could benefit from hiring workers better aligned with their long-term objectives. Ultimately, the research finds, the beneficiaries would be not just foreign workers but the entire economy.