Tuesday, January 8, 2008

How to lie to Congress without really lying

Remember when Bill Clinton said, "I did not have sex with that woman" Bill was not lying because the definition of "sex" did not include oral sex. Bill Gates recently testified before congress, "Given the state of our educational system, it is not surprising that U.S. companies are reporting serious shortages of skilled workers." (PDF) Similar to former President Clinton's definition of "sex," the term "labor shortage" has multiple definitions.

Wouldn't it be refreshing, if Bill Gates could come right out and say that he is not interested in hiring aging technical professionals and state his reasons why? If age, and the inability to unlearn the technologies preclude Americans from the job market -- shouldn't we be able to have an honest dialog about it?

Cool little video -- good music:

Skilled worker shortage by the numbers:

Senator John McCain's letter of June 21, 2001, states: "…the Information Technology Association of America estimated that there were more than 346,000 unfilled positions for highly skilled workers in American companies." We can assume that these "unfilled" positions have been filled. The H-1B fiscal per year limit was not attained in 2002 and 2003 -- Over 180,000 H-1B visas went unused in 2002 and 2003 collectively.

Further, McCain's letter quotes a Bureau of Labor projection stating: "…the American economy would generate 1.3 million new jobs each year for a decade in the computer and information-technology industries, but that American universities would be able to supply only a quarter of the graduates needed to fill those jobs." Checking the Labor statistics, these 13 million high-tech jobs did not materialize. (McCain letter at zazona)

The AeA Cyberstates report places U.S. high-tech employment at 5.8 million in 2006, this is up from the up from 5.5 million in 2000. The AeA definition of "high-tech employment" is very broad and more than adequately covers a definition of "computer and information-technology industries."

According to National Science Foundation averages, 271,936 citizens and permanent residents earn Bachelors degrees in Computer Science every six years. Excluding Associate Degrees in Computer Science, there was a labor shortage of roughly 18,000 high-tech workers between 2000 and 2006. The Bureau of Labor projections missed the mark by almost 100%.

Common sense would dictate that a shortfall of 3000 high-tech workers per year does not justify importing 939,770 (L-1 & H-1B) guest workers for the years 2002 - 2006, according to the Department of Travel. In computer related occupations, the OIG reports that 90% of L-1 and 43% of H-1B visas are computer related. Using these averages computer-related absorbed 552,497 guest workers for the 2002-2006 period, the employment shortfall is over 500,000 jobs.

There is also evidence that wages are going down.

Effective January 1, 2008, the minimum [California] hourly rate
for exempt computer software professionals will be $36, down from this
year's minimum of $49.77. On an annualized basis (based on a 40-hour workweek), the new minimum salary will be $74,880 (down from $103,521.60).

Note: this is the wage that California requires employers to pay exempt software professionals -- the 80 hour work week is not uncommon and the high rate discourages employers from avoiding overtime pay through exempt-salary compensation.

Variations in measuring Labor Shortages:

As is pointed out in the 1998 study, Skill Mismatches and Worker Shortages: The Problem and Appropriate Responses, there are at least five different definitions of the term "Labor Shortage." Depending upon the model of Labor Shortage you desire -- simply pick the definition that fits your desired conclusion.

The Social Demand Model
The Blank-Stigler Model
The Arrow-Capron Dynamic Shortage Model
The "rate of return model"
The monopsonistic labor market model

Myself and other non-economists, including Congressmen, would probably assume the term "Labor Shortage" in the context of the Blank Stigler model.

One of the first major studies of occupational shortages was conducted by David S. Blank and George J. Stigler.11 Blank and Stigler define a shortage as follows: "a shortage exists when the number of workers available (the supply) increases less rapidly than the number demanded at the salaries paid in the recent past."

There are several problems with the Blank-Stigler model. First, as discussed below, an increase in demand is only one of the possible causes of a shortage. Thus, the Blank-Stigler model ignores other possible causes of occupational shortages. Second, Blank and Stigler indicate that a shortage can be identified by rising wages in the affected occupation. Wages may not rise, however, because of market imperfections such as controls on wages or imperfect information.

Controls on wages? Prevailing wage is a form of control on wages. Imperfect information? The Department of Labor missed their projections by almost 100%

A modified version of the Social Demand Model is the apparent definition that is expounded in the mainstream media.

This type of definition does not imply that the labor market is in disequilibrium; instead it describes a situation where the person who claims there is a shortage does not like the market's results. Arrow and Capron explain the problem with this definition as follows:

In particular, careful reading of such statements indicates that the speakers have in effect been saying: There are not as many engineers and scientists as this nation should have in order to do all the things that need doing such as maintaining our rapid rate of technological progress, raising our standard of living, keeping us militarily strong, etc. In other words, they are saying that (in the economic sense) demand for technically skilled manpower ought to be greater than it is -- it is really a shortage of demand for scientists and engineers that concerns them.

With the Social Demand Model definition, Bill Gates can, without lying to Congress, testify that there is a labor shortage. The underlying competitiveness message is not the shortage of qualified workers, it is the fact that competitors are not bound by age-discrimination statutes.

The key determinant of whether there can be shortages for some parts of an
occupation is whether all workers within the occupation are reasonable substitutes for each other. If not, a shortage can exist within an occupation while other subcategories are in equilibrium or even in surplus.

...a shortage may exist for the entire occupation or only for workers with selected
characteristics. For example, training for engineers has changed considerably
over the past 20 years, and older electrical engineers may not be good substitutes for new engineers who have more training in designing integrated circuits.

Let's suppose for a moment, the following:
Human Resources departments directed to seek out new graduates
Placement Agencies are prolonging commissions by placing guest-workers
H-1b Immigration Attorneys have developed a 200 million yr revenue source on initial visas.

In effect, we have created a personnel machine that shortens careers, this behavior will devalue the investment in the particular occupation -- through premature retirement/displacement.

The "rate of return model" is based on the application of internal rate of return analysis to alternative occupations. The costs of investing in a particular occupation are defined as the sum of the direct costs for higher education, training, and supplies, plus the indirect costs of foregone wages that are incurred during periods of training.

Harrington and Sum note that the rate of return approach is "beset with numerous methodological and measurement difficulties." One important problem is that we cannot observe the future earnings streams from various occupations.

This is where a disconnect in communications is occurring due to political correctness. The "Industry" is telling us that the optimal candidate is young, with a recent education, willing to relocate and pay regular attorney fees. The "Industry" is also telling us that they do not have career path for older workers being displaced by global access to the domestic employment pool.
Severity of the shortage. Unlike the two dimensions discussed above, it is not easy to develop good measures of the severity of a shortage. Conceptually, we can measure the severity of a shortage in terms of the magnitude of the changes in wages required to restore equilibrium or in terms of the number of workers added to the occupation to alleviate the shortage. There are several difficulties with these concepts. First, we do not generally observe the supply and demand curves for specific occupations. Thus, we cannot directly estimate the size of the labor or age gap of a shortage. Second, even if we could measure supply and demand, it would not be easy to classify a particular gap as large or small, especially when comparing across occupations -- occupations vary significantly in their normal vacancy rates and wage dispersion. Thus, a high vacancy rate for one occupation with a shortage may be characteristic of another occupation in equilibrium.

Labor shortage? Or are we witnessing an extremely dynamic occupation that is in a state of equilibrium? The perceived labor shortages have now existed for over twenty years. Are misidentified labor shortages simply characteristics of the high-tech occupations in equilibrium?

Political correctness eliminates the ability to candidly discuss age-discrimination and the hiring policies of Business Process Offshoring specialists also seems to be off-limits. President Bush tells us that the aging tech-worker problem can be resolved by sending the best educated workers in the world to community college. Perhaps there is a better idea.

Employment for Displaced Engineers and Computer Scientists:

From Senator Grassley's list of, "Top 20 H-1B Employers 2006," Business Process Outsourcing Specialists used 35,365 out of 48,159 (73.43%) of the L-1 and H-1B visas on the list.

Offshoring is a fact of life, however qualified Americans are being excluded from the domestic workforce by "rubber-stamp" processing of L-1 and H-1B visas to foreign interests. I contend that companies such as Intel and Microsoft, American producers of tangible goods, should be preferred customers of USCIS, while foreign based Business Process Outsourcing firms should have an extremely hard time procuring long term visas.

Department of Travel data shows a total of 315,737 L-1 Intracompany visas issued 2002 - 2006. The L-1A visa matures at 7 years, and the L-1B at 5 years.

Wage and Social Protections:

The intent of the 65,000 visa GATS agreement does not include the "brain-drain" of dual-intent citizenship provisions. Additionally, under the GATS agreement, H-1B visas are not required to be six year visas.

The H-1B guest worker should be encouraged to complete his/her assignment and return home, or concurrently enroll in post-graduate studies to qualify for an Employment Based green card visa. Moreover, a labor shortage should not exceed the first 3 year term of the H-1B visa. H-1B visas should be progressively more expensive and difficult to renew.

By restricting the foreign based offshoring firms ability to apply for guest worker visas, American companies will enjoy the benefit of the entire 65,000 H-1B visa allotment. The number of visas is determined by law, but the value of the visa should be determined by the free-market system through competitive bid. H-1B approvals and prevailing wage requirements should be determined by salary offers -- in round-robin competitive bid -- within NAICS occupational groups.

The L-1 visa should be eliminated in favor of the short term B visa -- the requirement of maintaing a foreign residence and per diem costs will alleviate labor arbitrage conditions.

The employee portion of Social Security contributions should be refunded at departure to H guest workers from non-totalized nations.

The Employment based (EB) family and spouse visa counts could be moved to count against family based immigration caps. EB green card visas could then made directly available to postgraduates of American colleges interested in citizenship -- Immigration policy should not subsidize foreign colleges.

Closing thought:

Generally, the guest worker loses the ability to vote and attain property equity. Moreover, the exodus of workers causes the destruction of property equity, while the importation of workers causes hyper-inflation. The current sub-prime mortgage crisis is the result of hyper-inflation due to excessive immigrant housing demand and dwindling employment opportunities in the U.S.

The "free movement of human capital" seems to cause instability in equity markets. I think mabye they shouldn't fool around with that.

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