Writing during the U.S. debate over immigration reform in 2013, Professor Giovanni Peri discusses three principles that reform should follow. He argues that there are large gains from increasing the supply of highly-skilled immigrants to the United States, by allowing firms to bid for temporary work permits.

After months of acrimony, it now appears that immigration reform, and a comprehensive one at that, is within reach. While most of the debates have been about the immediate consequences of any change in policy, the goal should be to promote economic growth over the next 40 years.

Much of the reform debate has centered around granting legal status to undocumented immigrants, conditional upon payment of fees and back taxes. From an economic point of view, this will likely have only a modest impact, especially in the short run. Yet the problem of undocumented immigrants is likely to come back unless we find better ways to legally accommodate new immigrants. Much larger economic gains are achievable if we reorganize the immigration system to do that, following three fundamental principles.

The first is simplification. The current visa system is the accumulation of many disconnected provisions. Some rules, set in the past—such as the 7% limit on permanent permits to any nationality—are arbitrary and produce delays, bottlenecks and inefficiencies… . A more rational approach would have the government set overall targets and simple rules for temporary and permanent working permits, deciding the balance between permits in “skilled” and “unskilled” jobs. But the government should not micromanage permits, rules and limits in specific occupations. Employers compete to hire immigrants, and they are best suited at selecting the individuals who will be the most productive in the jobs that are needed.

The second important principle is that the number of temporary work visas should respond to the demand for labor. Currently the limited number of these visas is set with no consideration for economic conditions. Their number is rarely revised. In periods of high demand, the economic incentives to bypass the limits and hire undocumented workers are large… . [W]e propose that temporary permits to hire immigrants should be made tradable and sold by the government in auctions to employers. Such a “cap and trade” system would ensure efficiency. The auction price of permits would signal the demand for immigrants and guide the upward and downward adjustment of the permit numbers over years.

The third principle governing immigration reform is that scientists, engineers and innovators are the main drivers of productivity and of economic growth… . I have found in a study published in January that foreign scientists and engineers brought into this country under the H1B visa program have contributed to 10%–20% of the yearly productivity growth in the U.S. during the period 1990–2010. This allowed the GDP per capita to be 4% higher that it would have been without them—that’s an aggregate increase of output of $615 billion as of 2010.

Source: Excerpted from Giovanni Peri, “The Economic Windfall of Immigration Reform,” The Wall Street Journal, February 13th 2013. p. A15. Reprinted with permission of The Wall Street Journal, Copyright © (2013) Dow Jones & Company, Inc. All Rights Reserved Worldwide.

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