Based on ‘Reforming the US Immigration Regime’ case study: address the following In a 1 to 2 page policy memo: 1. Provide a brief history of the issue (only 2-3 paragraphs)

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Professor Marco Tabellini prepared this case with the assistance of Silvia Farina. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2021 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

M A R C O T A B E L L I N I

Reforming the U.S. Immigration Regime: A Polarizing Issue in a Polarized Era

In June 2013, a comprehensive reform of the U.S. immigration regime seemed finally on its way, after a decades-long impasse that had left the regulatory framework practically unchanged since 1990. On June 27, 2013, the U.S. Senate passed the Border Security, Economic Opportunity, and Immigration Modernization Act with a comfortable 68-to-32 majority.1 The bill was drafted by the “Gang of Eight,” a bipartisan group of four Democratic and four Republican Senators. “The bill . . . would be the most substantial change in immigration law since the 1986 reform,” wrote the Los Angeles Times.2 According to the New York Times, it would “fix chronic problems in the system” by both legalizing the status of more than 11 million undocumented immigrants residing in the U.S. and reorienting future immigration towards a more merit or skill-based point system.3

“The strong bipartisan vote we took is going to send a message across the country,” exulted Senator Chuck Schumer (D-N.Y.)—the leader of the Gang of Eight. “I consider this an astounding success,” echoed Senator Lindsey Graham (R-S.C.), another member of the bipartisan group.4 There was also optimism about the bill because it included a series of balances to appease the two parties and to reconcile the conflicting positions of employers and labor unions (see Exhibit 1). First, a clear path to the legalization of the status of undocumented immigrants (a key aspect for Democrats) was balanced by corresponding efforts to increase border security (the top priority for Republicans). Second, both to protect American unskilled workers and to encourage high-skilled immigration (especially in the STEM sector, as demanded by firms), the bill increased the weight given to personal skills. At the same time, the focus on “family-based” immigration, which had long characterized the U.S. system, was at least partly left in place.

The accomplishment by the Gang of Eight was praised by both Republicans and Democrats as well as by external actors. “The heart of immigration reform is fixing the legal immigration system so it works for America,” claimed the President of ImmigrationWorks, Tamar Jacoby. 5,6 The organization of young, undocumented immigrants, United We Dream, expressed its support for the legislation, noting that it represented a “major victory for the movement.” 7 Many also expressed their hopes because the bipartisan agreement was reached at a time of hyperpolarization in American politics.8 The bill might have marked the beginning of a new era, characterized by cooperation—rather than opposition—between parties. Agreeing over a common path, especially on a controversial issue like immigration, was not only of practical, but also symbolic, importance.

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However, the bill needed to go to the U.S. House of Representatives for consideration. Despite the widespread optimism about the future of the bill, the Gang of Eight received fierce critiques from multiple fronts. Senator Jeff Sessions (R-AL) lamented that the goals of those who crafted the bill were “not coterminous with, they’re not in harmony with, the nation as a whole.”9 Some worried about the impact that the bill would have had on wages and employment of native workers, namely those born in the United States, in particular the more vulnerable ones at the bottom of the income distribution. “Everything in this bill is about bringing in more people to compete for American jobs,” commented Roy Beck, an opponent of unrestricted immigration.10

Others feared that the bill would have opened the doors to undocumented immigration. Representative Lamar S. Smith (R-TX) warned that the proposed law would legalize “almost everyone in the country illegally before the border is secured.” “This of course will encourage even more illegal immigration,” he concluded.11 House Speaker John Boehner (R-OH) belittled the enthusiasm among the Gang of Eight and its supporters and repeatedly declared that the House had “no intention of ever going to conference on the Senate bill.”12 After Senate approval of the bill and cognizant of the atmosphere prevailing in the House, Senator John McCain (R-AZ) noted that the Gang of Eight would “stand ready to sit down and negotiate with you.”13 Yet, the margin for a discussion and a compromise was slim. “Apparently some haven’t gotten the message: the House is not going to take up and vote on whatever the Senate passes,”14 reiterated John Boehner.

One year later, on June 27, 2014, the situation had not improved. In fact, amid stark gridlock, the bill approved in the Senate had never been considered for a discussion in the House. The mood among the Gang of Eight and supporters of immigration reform was very different than just a few months before. Senator Bob Menendez (D-N.J.), one of the most fervent supporters of the bill, expressed his discontent: “It’s one of the most frustrating moments that I’ve had . . . [it] is incredibly disappointing not only to me personally but to millions of people across the country.”15 It was clear by then that immigration reform had failed.

“It’s so bizarre when you have the business community, organized labor, the faith community, law enforcement, you name it, everybody’s for it. Come on—how can you have something everybody’s for and not get it passed?” asked Representative John Yarmuth (D-KY), one of the members of the Gang of Eight.16 These puzzles were not new to policymakers, in the U.S. or elsewhere. Indeed, the question of immigration was one of the world’s most divisive political issues in the early twenty-first century. But why was immigration so vexing, what were the stakes for individual countries, and what might it entail for the future of globalization as such?

Immigration in American History

The Age of Mass Migration

As John F. Kennedy noted, the U.S. is “a nation of immigrants.”17 Since 1850, more than 80 million immigrants moved to America, and, as of 2018, 13.7% of its population was foreign-born (see Exhibit 2). Until the mid-nineteenth century, because of the high cost of crossing the Atlantic, immigration to the U.S. remained very low. However, since the 1850s, a series of factors—including changes in shipping technology, growing reliance on migrant networks, and rising incomes—triggered an unprecedented increase in emigration from Europe.18 Between 1850 and 1920, during what historians refer to as the Age of Mass Migration, more than 50 million migrants left Europe, with 30 million of them settling in the U.S.19,20

At the time, no barrier existed to immigration to the U.S. from Europe.21,22 The yearly number of immigrants rose from less than one per 1,000 residents in 1820 to an average of 15 per 1,000 residents

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between 1850 and 1920 (see Exhibit 3). During this period, the foreign-born share of the U.S. population increased from less than 10% to 14%, and one in five individuals in the U.S. labor force was foreign- born—a number seven percentage points higher than in 2018, when 13% of the individuals in the labor force were immigrants. The composition of European immigrants changed substantially over the period. In 1850, more than 90% of immigrants came from Northern and Western Europe—particularly from Great Britain, Ireland, and Germany. However, after 1890, the share of Southern and Eastern European immigrants started to rise, and by 1920, the stock of migrants from these regions was as high as 40% (see Exhibit 4).

The “new” immigrants—as the Italians, the Poles, and the Russians were typically referred to— were younger, less educated, more likely to be male, and less likely to settle permanently in the U.S.23 Also, they were culturally “more distant” from the original Anglo-Saxon settlers. For these reasons, they were often viewed with great skepticism. In 1896, the first President of the American Economic Association and third President of MIT, Francis A. Walker, stated that the U.S. had to “[protect] the American Standard of living, and the quality of American citizenship from degradation through the tumultuous access of vast throngs of ignorant and brutalized peasantry from the countries of Eastern and Southern Europe.”24 Stanford Professor (and future Dean) Ellwood P. Cubberley expressed a similar view in 1909, describing Southern and Eastern European immigrants as “illiterate, docile, and lacking in self-reliance and initiative.” Cubberley also worried that immigration would “dilute tremendously our national stock, and corrupt our civic life.”25

The Immigration Acts of the 1920s

In 1907, amid growing concerns about immigration, U.S. Congress established the Dillingham Commission to evaluate the impact of immigrants on American society and the economy. In 1911, after four years of investigations, the commission advocated for several measures to limit the inflow of immigrants, especially from “new” sending countries. Following the advice of the Dillingham Commission, in 1917, Congress introduced a literacy test that required all immigrants to be able to read and write. The literacy test was the precursor of much more far-reaching legislation. In 1921 and 1924, Congress approved a set of stringent country-specific quotas that drastically reduced the number of immigrants allowed to enter the U.S. in any given year.26 This was an unprecedented move, which caused the number of annual immigrants to plummet from over one million in 1910 to a mere 150,000 in 1924.

The 1924 National Origins Acts introduced quotas designed to exclude immigrants from “undesirable countries” from Eastern and Southern Europe.27 Entry slots were specific to each country of origin and were set to 2% of the foreign-born stock from each national group residing in the U.S. as of 1890.28 Because very few immigrants from Southern and Eastern Europe were living in the U.S. in 1890, the quotas disproportionately affected immigration from these regions. On the other hand, immigration from “old” sending countries (e.g., Germany, Norway, and Sweden) was much less restricted.

The Immigration Acts of the 1920s had a long-lasting impact. From its record high of 14% in 1920, the immigrant share of the U.S. population declined to just 5% in 1970. Between 1924 and 1965, only a few exceptions interrupted a period of very limited immigration.29 Among these, the most notable ones included the Jewish and the Eastern European refugees during World War II and in 1953, respectively, and the Bracero program that allowed four million Mexican agricultural laborers to work temporarily in some southern states.30

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From Country-Specific Quotas to Family Reunification

For a comprehensive change in its immigration policy, America had to wait until 1965, when Congress passed the Immigration and Nationality Act. The bill eliminated the country-specific quotas, increased the annual immigration cap to 270,000, and introduced a system of preferences for individuals with specific skills and who were sponsored by their employers.31 The single most important provision of the Immigration and Nationality Act was to give precedence to immigration for “family reunification” motives. This implied that “employment-based” migration remained significantly less important than “family-based” migration.32

The effects of the 1965 Immigration Act were dramatic. The share of the U.S. population born abroad increased to almost 14% by 2010—a level not seen since 1920 (see Exhibit 2).33 Furthermore, the immigrant population of the U.S. grew increasingly diverse: until 1970, more than 80% of the foreign- born stock originated from either Europe or Oceania and Canada; but this number fell to less than 20% in the following 40 years (see Exhibit 4). As of 2010, more than 50% of foreign-born individuals living in the U.S. came from Central and South America, and another 30% from Asia.

Despite its ultimate results, the original intent of the 1965 Act was not to increase the diversity of the U.S. population. In fact, it was precisely the opposite. Democratic legislator and Harvard Law School graduate Michael Feighan—one of the architects of the Immigration and Nationality Act—was convinced that, by eliminating the quota system, the (white) racial makeup of the U.S. would have remained intact. This would have been possible, according to Feighan, “if the country prioritized entry for people with family already in the United States . . . Since most Americans [in 1965] were white, their family members abroad would also be white.”34 Democratic Senator Ted Kennedy, the floor manager of the bill, expressed a similar view, stating that the Immigration and Nationality Act “will not upset the ethnicity mix of our society.”35 Along similar lines, upon signing the bill, President Lyndon B. Johnson declared that even though the Act “corrects a cruel and enduring wrong in the conduct of the American nation . . . [it] is not a revolutionary bill.”36

The Immigration and Nationality Act was amended and modified several times since 1965—most importantly with the 1990 Immigration Act, which increased the quota cap to 675,000 entries per year, revised and expanded the “employer based” visa categories, and altered several aspects of the exclusion and deportation procedures.37 However, its key elements remained unchanged, and the 1965 Act still governed the main aspects of American immigration policy when the Gang of Eight introduced its immigration bill in 2013.

Cracks in the System

An Outmoded Immigration Framework

Proponents of a comprehensive reform highlighted the need to renew the framework regulating immigration of foreign-born workers and students, which, using the words of Harvard Professor William Kerr, were “a global gift” for the U.S.38,39 Indeed, almost 20% of the American workforce with at least a college degree during the 2010s was born abroad—up from just 7% in 1980.40 Similarly, about one in three STEM workers and more than half of doctorate degree holders, respectively, were born abroad.41,42 Yet, with growing global competition for talent, an outmoded immigration framework was putting at risk the tremendous advantage that the U.S. economy had historically enjoyed.

Aware of these challenges, several U.S. firms complained that the prevailing system was hindering their “ability to recruit foreign workers.” This was true especially in the most dynamic sectors of the economy, such as the high-tech industry, where demand for high skilled immigrants vastly exceeded

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supply. According to a survey conducted by Harvard Business School, respondents (including business leaders) were in favor of increasing employment-based immigration by more than 300% relative to the current level, reducing the precedence given to family-based migration.43 Shifting away from family-based migration would have increased the weight given to skills and education of prospective immigrants in the selection process.

Many economists also stressed the inefficiency of the existing system, which capped the number of high skilled immigrant visas (the H1-B) at a mere 85,000 per year.44, 45 Since firms’ demand regularly exceeded the number of available permits, the U.S. government randomized them among potential applicants. “That is a very crude way of selecting,” noted William Kerr. “If you are Microsoft, you’re usually putting several thousand applications in so… to get about a third of your applications approved, but you don’t even get to pick which third of your candidates you most want to employ,” continued professor Kerr.46

Inefficiencies in the legal immigration framework were not confined to the H1-B visa system. In fact, even though one fourth of U.S. entrepreneurs were first generation immigrants, and 40% of founders of Fortune 500 companies were either first or second generation immigrants, no visa for entrepreneurs existed.47 This legal void represented an obstacle for talented individuals who wanted to move to the United States, and, indirectly, imposed severe costs to American born workers. Indeed, researchers “estimated the lower-bound of the job creation impacts of a start-up visa at nearly 500,000 new jobs over ten years.”48

Finally, the visa system was based on the premise that workers would have lived in the United States temporarily. In order to qualify for most visas, an immigrant had to show that he had “a residence in a foreign country which he has no intention of abandoning.”49 Such temporary arrangement meant that firms were unable to make long-term plans, and may have been reluctant to invest in their workers’ human capital and skills, cognizant that such investment might have not paid off, had workers not been granted permanent residency. Moreover, workers lived under significant uncertainty, with both economic and psychological negative consequences. High skilled, talented individuals might have found a job in another country. Yet, this may have been harder, or even impossible, for unskilled workers, who were forced to return to their home country once their visa expired, unless they decided to stay in the U.S. without legal documents.

Undocumented Immigration: Problems and (Failed) Solutions

While many demanded reforms to increase the efficiency of the American immigration system, the most salient issue since the early 1990s had become that of undocumented immigration. This was a major unintended consequence of the Immigration and Nationality Act, because the bill had introduced numeric caps to immigrants from each country, including (for the first time) those in the Western Hemisphere.50 In 1964, U.S. Congress also terminated the Bracero program, which had been used by U.S. employers since 1942 to recruit temporary agricultural workers from Mexico. The termination of the Bracero program, coupled with the introduction of limits to legal immigration from Mexico, gave rise to undocumented immigration, as many Bracero workers kept crossing the border to perform the same jobs they had been doing until 1964.51

The number of undocumented immigrants increased steadily until the mid-2000s when, according to the best available estimates, about 650,000 undocumented immigrants were entering the U.S. each year.52,53 Pew Research Center statistics indicated that the number of unauthorized immigrants living in the U.S. reached a record 12.2 million right before the Great Recession of 2007–2009 (see Exhibit 5).54,55

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Since the 1980s, policymakers had tried to respond to the issues posed by unauthorized immigration. On the one hand, resources devoted to policing and border control increased more than ten times between 1980 and 2000.56 Moreover, the U.S. government increased penalties for employers hiring undocumented immigrants. On the other hand, multiple attempts were made to legalize the status of individuals who permanently resided but who entered the U.S. without authorization. The Immigration Reform and Control Act (IRCA) of 1986 took a first, important step in this direction, legalizing the status of most unauthorized immigrants who had entered the U.S. before 1982.

IRCA, signed in 1986 by President Ronald Reagan, built and expanded on the provisions included in the legislative process initiated almost 10 years before under the presidency of Jimmy Carter in 1977.57 The bill was based on three key components, also referred to as the “three legs of the stool” by its sponsors: increasing border security, cracking down on employers hiring unauthorized immigrants, and legalizing the status of foreign-born individuals who had entered the country illegally (see Exhibit 6). The effects of IRCA were dramatic: under the new law, almost 2.7 million undocumented immigrants obtained legal status. Newly legalized immigrants were also able to sponsor their relatives, thereby leading to a surge in family-based immigration during the 1990s.58

Many argued that, despite its intents, IRCA was a failure. Because of a five-year gap between the date of the law’s enactment and the qualifying date, hundreds of thousands of undocumented immigrants remained in the country without legal status. “Everyone assumed they would just leave, that the new employer restrictions would push them out,” noted Doris Meissner of the Migration Policy Institute.59 Yet, that did not happen. In fact, the legal loophole increased incentives for more migrants to move to the U.S. illegally, hoping for future amnesties.60 In addition, “Congress didn’t foresee at the time that employers would want more immigrants in the years ahead,” continued Doris Meissner, and the law did not provide a framework to manage larger employment-based migration flows.61

Ultimately, while IRCA was designed to be a “one-time deal” to avoid “a continuing series of amnesties” as noted by Senator Chuck Grassley (R-IA), it was followed by a record increase in the number of immigrants living without authorization in the U.S.62 The issue of undocumented immigration thus remained unsettled.

In 2001, U.S. Congress advanced a bipartisan proposal to introduce the DREAM Act with the goal of creating a path to legal status and permanent residency for undocumented immigrants who entered the U.S. as minors. The Act was reintroduced many times since then, but never became law (see Exhibit 7). After 11 years of impasse, in 2012, President Barack Obama signed an executive order introducing the Deferred Action for Childhood Arrivals (DACA) program, which offered a two-year, renewable deferral from deportation for individuals who entered the U.S. as children without citizenship or legal residency status. The program, which had stringent eligibility criteria, not only protected individuals from deportation, but also guaranteed some basic benefits—such as work permits and the possibility of obtaining employer-sponsored health insurance—that facilitated immigrants’ integration into American society.63

The Gang of Eight and the Immigration Reform

Designing a Path to Citizenship

The first goal of the Border Security, Economic Opportunity, and Immigration Modernization Act of 2013 was to design a path for the legalization of the undocumented immigrant population residing in the U.S. Individuals who had entered the U.S. before December 31, 2011, were eligible to apply for the change to their legal status (provided that several conditions were met) upon payment of a penalty and an application fee as well as “back taxes” (see Exhibit 1). The Gang of Eight stressed both the

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humanitarian aspect and the potential economic benefits deriving from the legalization of undocumented immigrants.

Days before the Senate approval, the Congressional Budget Office (CBO) issued a report stating that the immigration bill would have decreased the federal deficit by almost $900 billion over the subsequent 20 years.64 The estimates from the CBO reflected an increase in tax revenues due to both higher payroll and income taxes and a larger labor force. However, the CBO remained silent about the potential redistributional effects on the native worker population, especially among those employed in jobs more likely to attract newly legalized immigrants.

Legalizing the status of undocumented immigrants was a top priority for the Democrats, who were held accountable by their (ethnically, racially, and culturally) diverse constituencies. The majority of Republicans agreed that repatriation of the undocumented foreign-born population was both logistically unfeasible and morally unjustifiable. However, they deemed an increase in border security a necessary condition for the legalization process to occur. This was key, according to the Republican bloc, to prevent the rise of illegal immigration, likely encouraged by expectations of similar amnesties to occur again in the future.

Together with more stringent border security, the 2013 bill also envisaged tighter employment regulation that required employers and firms to electronically verify the legal status of their workers. The logic of this requirement was clear. If employers were prevented from hiring undocumented immigrants—and if the cost of doing so illegally was high enough—the economic benefits for prospective (undocumented) immigrants would have fallen. Coupled with higher costs (in the form of higher risks of crossing the border illegally), lower expected gains would have discouraged (illegal) immigration in the first place. These provisions, the Gang of Eight hoped, would have both facilitated the integration of existing undocumented immigrants (as demanded by Democrats) and increased the security of the U.S. border (as sought by Republicans).

Reforming the Framework for Legal Immigration

Besides fixing the issue of undocumented immigration, the 2013 immigration reform aimed to increase the importance of personal skills and talent in the process of legal immigration. The Gang of Eight planned to expand the high-skilled immigrant visa category (the H1-B) from 85,000 to 180,000, adjusting it flexibly depending on yearly fluctuations in labor demand.65 This provision would have benefitted the U.S. economy in at least two ways. First, flexible—rather than fixed—quotas would have allowed firms to get access to more (foreign) labor during periods of economic growth, while at the same time shielding American workers from immigrants’ competition during recessions. In this way, the economy would have adjusted to shocks more flexibly, thereby smoothing economic cycles. Second, the higher cap of the H1-B visa would have favored the inflow of talent, in turn promoting economic growth, innovation, and entrepreneurship.66

To reach an agreement between labor unions and employers, members of the Gang of Eight exerted a great deal of effort to mediate between the divergent positions of the