As a tech worker I’ve always been bewildered by the high compensation on offer for technical workers in the Bay Area. If you’re not in tech and you want to see the gory details, see this site, which is quite accurate as far as I can tell.
I’ve sometimes wondered if the whole thing is some sort of Ponzi scheme or bubble: Employers don’t want to feel like they’re getting “second best” labor, so the compensation rises past a level that might be reasonably justified on an ROI basis. The whole song and dance is funded by VC money and a few very lucky big ticket exits that keep the party going.
Academic economists would typically point to an efficient market perspective: Employers act in rational self interest, overpaying for labor would be a very expensive mistake, and so the prices probably simply reflect workers capturing a larger portion of their contribution. But could we really be worth so much?
It turns out we can actually answer this question. Dimmock et al (2019, pdf) were able to do a causal analysis using random assignment provided by the H-1B lottery (h/t Alex Tabarrok). When you hire a worker on an H-1B visa. There’s a lottery in Spring, and you have a 50/50 chance of winning. If you win, the visa takes effect in September. Otherwise you’re out of luck.
Maybe I shouldn’t have been surprised, but the results are extreme. Winning a single H-1B lottery raises the likelihood of a successful IPO dramatically. Each standard deviation increase in win rate (which was roughly equivalent to a single incremental win) increased the rate of successful IPOs within 5 years by 23% (rising from 6.6% to 8.1%). How much does that make each H-1B win worth? If the marginal benefit of a lottery win is approximately 1.5% of an IPO, and we assume an IPO within 5 years is worth $100M relative to alternative outcomes, then that worker is worth $1.5M. And what’s especially amazing is that this is simply value over replacement player: Typically, when a company loses the lottery, they re-open their hiring req and hire someone else. So this is actually the value of the immigrant worker over and above the domestic alternative.
I see two main takeaways here. One is, immigration is underrated. As Bryan Caplan has been shouting from the rooftops, immigrants don’t just “take our jobs,” they contribute in ways that are irreplaceable. Second, as heady as the market for tech workers may appear, it is not a bubble: At least in aggregate, tech workers are writing their own check.