Skilled immigration frictions as a barrier for young firms
What this paper finds — and why it matters
High-skilled immigration policy frictions—particularly the H-1B visa lottery, fixed annual cap, and associated compliance costs—impose well-known burdens on firms, but their disproportionate impact on young, technology-intensive companies has received less attention. This paper provides the first study combining firm-level panel data on H-1B outcomes with a general equilibrium model of firm dynamics to quantify these effects. Using the random allocation of H-1B visas in the FY 2014 and FY 2015 lotteries as quasi-random variation, the authors find that lower H-1B visa win rates significantly reduce the survival of young firms (aged 0–5) in technology-intensive sectors, while the impact for older firms is not statistically significant. A general equilibrium model with endogenous firm entry and exit, skilled foreign labor, and H-1B-style policy frictions matches the age distribution of high-tech firms and shows that eliminating major immigration policy frictions would increase average productivity in the high-tech sector primarily by enabling more young firms to enter and survive, which in turn drives the exit of older, less productive firms.
Summary of a forthcoming paper, AI-assisted and human-reviewed. See the linked original for the authoritative claims and full conditions.
Q1. What is the quasi-random identification strategy, and what does it identify?
The paper uses H-1B visa lottery win rates in fiscal years 2014 and 2015 as quasi-random variation in access to skilled foreign workers, combining National Establishment Time Series (NETS) data on firm survival with Labor Condition Application (LCA) and H-1B petition data. Because the lottery randomly allocates visas among firms that applied (when the cap is binding), the fraction of applications that result in approvals is plausibly exogenous to firm characteristics, conditional on applying. The empirical finding—that lower lottery win rates significantly reduce survival of young firms (0–5 years old) in tech-intensive sectors but not of older firms—is identified off this lottery variation. The age-heterogeneity result is central: large incumbent firms have alternative channels (offshore hiring, internal labor markets, H-1B cap-exempt hires) that small, young firms lack.
Q2. Why are young high-tech firms more exposed to H-1B frictions than older firms?
Young firms in high-tech sectors depend heavily on specialized skilled foreign workers because they compete in rapidly changing technology fields where the domestic talent pool may not supply the precise skills needed at the pace required; they cannot easily substitute with a second-choice candidate or offshore to a foreign affiliate as large multinationals can. The paper cites GAO (2011) survey evidence that in years when the H-1B cap bound, most large firms found alternative (often costly) ways to hire their preferred candidates, while small firms were more likely to fill positions with different candidates, incurring delays and economic losses.
Q3. What does the general equilibrium model predict about aggregate productivity?
The model shows that eliminating major H-1B-style immigration policy frictions would increase average productivity in the high-tech sector through the entry and survival channel: fewer frictions allow more young firms to enter and survive, which raises competitive pressure and leads to the exit of older, less productive firms (a selection effect via creative destruction). This mechanism implies that the productivity gain from liberalizing skilled immigration comes not primarily from incumbent firms hiring more foreign workers, but from the change in the firm age and productivity distribution—a general equilibrium effect that partial-equilibrium analyses based on incumbent firms would miss.
Q4. How does the model match the data on firm dynamics?
The model is calibrated to match the age distribution of firms in high-technology sectors in the data, including the stylized fact that the share of young (0–5 year old) high-tech firms has declined since the early 2000s concurrent with a period of more restrictive skilled immigration policy (the H-1B cap fell from 195,000 in 2003 to 85,000 in 2005 and has remained constant). The model also captures the pattern—documented in the data—that the entry of younger firms leads to a greater exit of older firms, consistent with the Hopenhayn-Rogerson (1993) model of firm dynamics.
Key concepts
H-1B visa frictions : the set of costs and constraints associated with the H-1B temporary skilled worker visa program in the US, including per-firm application costs, a fixed aggregate cap of 85,000 visas for private firms per year, and random lottery allocation when applications exceed the cap.
firm survival channel : the mechanism through which immigration policy frictions reduce the probability that young high-tech firms survive to maturity, as distinct from the hiring channel (whether incumbent firms hire foreign workers); the paper argues the former is the quantitatively relevant margin.