Trump's H-IB fee hike will prove to be self-destructive for the US

It ignores key economic factors and will likely drive businesses out instead of boosting local hiring

- TULSI JAYAKUMAR

US President Donald Trump's dramatic H-1B visa fee increase to $100,000 isn't just a political statement; it's a profoundly flawed economic manoeuvre. While it may seem like a straightforward way to 'protect' American jobs, a dive into the principles of production and labour economics reveals it to be a misplaced policy that risks hurting the very economy it aims to help. The problem with it is that it only considers the price of labour, completely ignoring its productivity.

For a business, an optimal production strategy is determined by two key factors: the cost of inputs and their respective productivity. This is captured by the economic principle that a firm is at its most efficient when the 'marginal rate of technical substitution' (MRTS or the rate at which one input can be swapped for another while keeping output constant) is equal to the ratio of their prices. In turn, the MRTS should be equal to the ratio of the marginal productivity of these inputs.

Trump’s policy is a heavy-handed attempt to manipulate the price ratio between labour working on H-IB visas and local labour. By making the cost of H-1B labour exorbitantly high, the new US visa policy aims to make domestic American labour a cheaper and thus more attractive alternative. The touted logic is that this will force companies to hire more Americans.