The U.S. faces an immigrant “brain drain” that could deeply affect the future of our technology sector.

Multiple forces are encouraging immigrant IT professionals in the U.S. to return to their home countries, raising the question: Will we be able to get them back when we finally realize how much we need them?

Here are the major forces at work in this trend:

The Recession

The current economic downturn is playing a big part in sending skilled workers back home. Many outsourced IT workers are returning to their home locations due to cost pressures faced by their clients. If a client sends more work offshore, then the IT worker who returns home is still engaged. So there is a cost saving and no loss of knowledge. If, however, the client terminates the project altogether, they lose the knowledge of the resource and there’s no saying if the client can re-engage that same resource again when the market picks up.

Lures from Abroad

Thousands of skilled immigrant IT professionals are leaving the U.S. for greener pastures elsewhere. Human resources directors in India and China report that what was a trickle of returnees a decade ago had become a flood. Job applications from the U.S. have increased tenfold over the last few years. A recent Kauffman Foundation study found that:

• The most common professional factor motivating workers to return home is the growing demand for their skills in their home countries.
• Returnees also believe that their home countries provide better career opportunities than they can find in the U.S.

There is another lure for Asian immigrants: both India and China offer skilled workers incentives to return home. In China, for example, a “green passage” project started in 2007 gives returnees guaranteed university educations for their children, along with tax benefits.

Meanwhile, the dynamics of the global war for talent are rapidly changing. The recent unveiling of the EU ‘Blue Card’ program allows high-skilled workers from outside the European Union to work in multiple EU countries. Because they are affected by a more rapidly aging population than the United States, these countries are aggressively working to liberalize their high-skilled immigration laws.

Restrictive U.S. Immigration Policies

Another factor is a provision of the U.S. economic stimulus package that would restrict H-1B hiring at companies that have received funds from the Trouble Assets Relief Program (TARP) and have more than 15 percent of their workers on visas. The political motivation is the suspicion that some U.S. high-tech companies have reduced their workforces, but aren’t necessarily cutting H-1B visa holders or foreign nationals ahead of U.S. citizen employees.

Conclusion

Restricting the immigration of highly skilled workers has a negative impact on innovation. A recent University of Michigan study found that “when the federal government increased the number of people allowed in under the [H-1B] program by 10 percent, total patents increased by around 2 percent in the short run.

In the final analysis the war for talent is a complex workforce issue and there are no easy answers. The United States needs to be aware of the risks with restricting immigration if it hopes to keep up innovation, particularly in technology-related areas. Even if economic conditions force layoffs, companies will need to think ahead to a time when they may badly need extra technical help. Many experts agree that while we may not need all these workers in the U.S. during the recession, we will absolutely need them to help us recover from it.

We may be in the midst of a recession with increasing unemployment and fewer jobs, but it’s very likely to be a short-term phenomenon that will not have much of a long-term effect on talent shortages. Without dramatic action, the gap between demand and supply will very likely continue to widen.

I’ve written in previous posts about the war for talent. The aging of the U.S. population and other demographic factors which will negatively impact the supply of talent, particularly among highly educated and skilled knowledge workers. But these problems are likely to be exacerbated by our immigration policy.

Here’s why:

Competition from Europe

The European Union recently approved the Blue Card program, which was modeled on the United States’ Green Card. The Blue Card (named for the color of the EU’s flag) will allow skilled foreign workers to work and live anywhere in the EU’s 27 member countries.

Currently, 85% of global unskilled labor goes to the European Union and only 5% to the United States. In contrast, 55% of highly skilled immigrants head for the United States and only 5% to Europe. With the Blue Card, the EU hopes to dramatically change this imbalance.

Singapore, Japan, and Hong Kong have implemented similar programs, following the lead of Australia and New Zealand. The goals of all these programs are the same: to attract skilled talent. These countries are also foreseeing a war for talent, and although it has not been publicly stated they are actively trying to divert some of the talent that now flows to the United States.

The EU and other countries may well succeed because their criteria for handing out permanent residency permits and work visas are much more liberal than those in the United States, and the procedures will be simpler and more streamlined. Some even allow employers to hand out residency permits along with employment offer letters.

For jobs where a citizen is not available, an immigrant to the EU would only need to show a degree and three years of experience. Recognizing the need to attract young talent to Europe, immigrants under age 30 will have even easier requirements in qualifying for Blue Card status.

H-1B Visa program

Our system of providing work visas and residency permits leaves much to be desired. It can take 5 to 10 years to get a Green Card and the system heavily favors family ties instead of skills and experience. The process is convoluted, involving multiple government agencies and arcane procedures. The number of annual work visas is still only 85,000 despite clear evidence of a shortage of skilled workers. For example, the unemployment rate in computer- and mathematics-related occupations is about 2.1%, or full employment when allowing for people in transition between jobs. The number of visas was actually lowered from 195,000 in 2004, to the current level which is the same as what existed 15 years ago.

In testimony before Congress, Bill Gates argued for elimination of the cap on H-1B visas. But in pandering to groups like FAIR (Federation for American Immigration Reform) and other isolationists, Congress has chosen to do little about the problem.

The problem is mostly political. Anti-immigrant groups are opposed to any loosening of immigration standards, though they neglect to mention that immigrant workers make up barely 3% of the skilled labor force yet disproportionately contribute to the economy. A quarter of all Nobel prizes won by Americans have gone to immigrants, and a similar proportion of IT firms were started by Indians and Chinese.

A study by the National Foundation for American Policy found that the average S&P 500 company creates five new domestic jobs for each highly skilled H-1B visa employee it hires. By raising the H-1B cap, Congress would create more domestic jobs, allowing companies to fill vital positions and enable them to expand their operations at home instead of moving overseas.

The Future

There are glimmers of hope. Representatives Gabrielle Giffords (D-AZ) and Lamar Smith (R-TX) have introduced bills raising the cap for H-1B visas. These are the Strengthen United States Technology and Innovation Now (SUSTAIN) Act and the Innovation Employment Act.

The SUSTAIN Act would temporarily raise the cap to 195,000 for FY 2008 and FY 2009, while the Innovation Employment Act would initially raise the cap to 130,000 and allow the cap to increase the following year if it is reached.

Raising the cap is necessary, but more should be done to make H-1B visas flexible. Their number should reflect the economy’s need for high-tech workers, not arbitrary limits set by Congress.

But the prospects of satisfying the U.S. need for talent solely from increased immigration are not good. The EU hopes to attract 20 million skilled workers over the next two decades as a result of the Blue Card program. That may be overly optimistic but it will undoubtedly negatively impact the flow of talent to the United States.

Companies clearly cannot count on immigration to satisfy their need for talent. They will have to continue exploring other options, like utilizing the flexible workforce to meet their talent needs.

Relaxing the regulations around immigration is often cited as part of the long-term solution to the inevitable talent shortage. At the center of this discussion is the H-1B Visa program.

Applications for visas for highly skilled immigrants are expected to decline due to the current recession, but technology companies continue to maintain that foreign-born workers represent a crucial part of the talent pool they need in order to remain competitive.

The U.S. Citizenship and Immigration Service began accepting H-1B visa applications for the upcoming fiscal year 2010 on April 1^st.

This year there are 65,000 visas available for foreign workers who have the equivalent of a bachelor’s degree. There are an additional 20,000 available for those workers who have obtained an advanced degree from a U.S. university.

Last year, the USCIS received 163,000 applications during the first week of April. It was forced to use a lottery system to determine visa recipients. Although demand is expected to drop this year, most experts still predict that the visa demand will exceed supply.

The sour economic climate is also affecting the way many companies are using H-1B visas. Many of this years applications will be for employees who are currently working but were denied visas in previous lotteries, according to Robert Hoffman, vice president for government and public affairs for Oracle and co-chair of Compete America.

These workers are able to hold jobs by using an optional practical training designation, which provides a 12-month bridge between a student visa and an H-1B visa.

In other cases, companies like Microsoft are applying for H-1B visas for workers who are currently employed on L visas because they have transferred to the U.S. from a foreign location. “What you are seeing is the program being used to meet different needs this year than in previous years,” said Brad Smith, Microsoft general counsel.

As you would expect during this recession where millions of U.S. workers have lost their jobs, the H-1B visa program is under attack. For example, despite its enthusiasm for the H-1B visa program Microsoft plans to lay off as many as 5,000 employees, or 5 percent of its workforce. This only fuels the fire for critics. Similar cuts at many other companies are contributing to the backlash in Washington against H-1B visas, which detractors say deny opportunities to American workers and reduces salaries.

As part of the massive federal government stimulus package, Congress created additional H-1B visa rules for companies that receive federal bailout funding. These companies will be forced to meet a standard of proof showing that American workers are not available.

Although H-1B workers constitute a tiny portion of employees at U.S. companies, executives like Microsoft’s Smith fervently believe that their skills are critical to achieving product breakthroughs. At the root of the problem is the fact that the U.S. simply does not produce enough of its own scientists and engineers to meet the demand. For example, a 2006 study showed that 61 percent of computer science Ph.D. students in the U.S. were not citizens.

“We are going to need to continue to bring in that kind of extraordinary talent,” Microsoft’s Smith said. “We’re not talking quantitatively about a large number, but we are talking qualitatively about people who boost economic competitiveness.”

Most experts dispute the idea that a gain in H-1Bs is a loss for American workers. These are visas that work to complement the U.S. workforce. In fact, a study by the National Foundation for American Policy shows that for every H-1B position another five jobs are created.

At its root, the problem is one of talent supply and demand. One of the challenges in an economy as large and diverse as that of the United States, is that regardless of the overall employment level, there will always be localized imbalances. In addition to H-1B’s, many companies are able to find the specific talent they need by embracing the flexible workforce. For example, M Squared Consulting clients benefit from the deep bench of talent in the M Squared Consultant Network - we are able to rapidly bring proven industry and functional expertise to client engagements. This allows companies to focus on their core business while we find and manage the talent that is focused on delivering client results.

Struggling to find enough doctors, nurses and linguists for the war effort in Iraq and Afghanistan, the Pentagon will temporarily recruit foreigners who have been living in the United States on student and work visas, or with refugee or political asylum status.

Defense Secretary Robert Gates recently authorized the Army, Navy, Air Force and Marine Corps to recruit certain legal residents whose critical medical and language skills are “vital to the national interest,” officials said, using for the first time a law passed three years ago.

Though the military previously has taken recruits with green cards seeking permanent residency, Gates’ action enables the services to start a one-year pilot program to find up to 1,000 foreigners who have lived in the states legally for at least two years on certain types of temporary visas.

The new recruits into the armed forces would get accelerated treatment in the process toward becoming U.S. citizens in return for serving in the U.S. military.

What’s the urgent need? The Pentagon’s doctor and nurse corps remain 1,000 short of the numbers needed to treat armed forces patients. It is hoped that the program would fill the gaps. It also needs people with special language and cultural skills for a war on terrorism that has taken the armed forces across the globe.

There is some precedent here. The armed forces have used foreigners since the War of 1812 - over the years some 700,000 have served. There are now 29,000 non-citizens in uniform today. With roughly 8,000 more enlisting every year. The difference is that up until now U.S. citizenship was not part of the equation.

But because of the counterterrorism war begun after the Sept. 11, 2001, attacks on America, President George W. Bush signed an executive order making foreigners who join the military eligible to apply immediately for citizenship. They essentially go to the head of the line among citizenship applicants, having their cases processed in about three years as opposed to the usual five years it takes others.

These benefits, however, do not come without cost to the job-seeker. All recruits will have to pass the same physical, mental and aptitude tests required of all who join the armed forces. In addition, Health care workers will have to meet all medical professional criteria to practice, be proficient in English, and agree to enlist either for three years on active duty or six years as reservists. The linguists/culture experts will have to enlist for four years of active duty service.

As talent agents for some of the most seasoned and experienced professionals in the workforce M Squared Consulting has a unique view into the dynamics of the labor market. Given the current cycle of negative economic news and a steady stream of layoff announcements it seems odd to be talking about the war for talent. The reality is that the U.S. workforce is aging, there are already shortages of skilled labor (particularly in the sciences and professional ranks), and the problem will only grow over time. Today’s negative economic reality is merely masking the problem.

When we enter an economic recovery these problems will once again be brought to the forefront. One can’t help but wonder if the Pentagon’s approach to “importing” skilled labor, with the promise of expedited U.S. citizenship, will be one that we are forced to expand to the private sector.

Time will tell.

Innovation and economic growth require talent. That simple truth is the underlying basis for the historic growth and success of the United States. Despite the current economic downturn, the foundations of a global talent shortage are already in place, and the effects will become more apparent as the economy rebounds.

While U.S. legislators seem to be asleep at the wheel, other countries are taking talent issues much more seriously. Many countries have liberalized their immigration policies for high-skilled talent. That presents a major challenge to America’s historic domination in innovation and attracting high-skill immigrants. Australia, Canada, and New Zealand are the most aggressive. They, correctly, believe that immigrants are a source of economic growth. As such, they have strong pro-immigration policies that value highly skilled immigrants.

For example, the Australian Parliament recently eased immigration laws with the stated goal of attracting more high-skilled labor. This was in recognition of the fact that past and future decreasing birth rates and increasing demand for skills will make skilled labor the quintessential scarce resource for the next fifty years.

Complacency about attracting high-skilled talent can have severely negative consequences. The Bureau of Labor Statistics projects a growth of 40%, or over 500,000 new IT-related jobs through 2016. Domestic supply is simply not enough to cover this need at current levels. The number of degrees granted across all IT-related categories is about 54,000 annually, and is trending downward. Adding to the supply shortage is the fact that the number of workers in the 55-and-older group (the Baby Boomers) will grow by 47% in the next eight years - approximately 5.5 times the 8.5% growth of the labor force overall, with many of them actively planning to retire.

While a disproportionate number of skilled immigrants still come to the U.S., the numbers that are staying in their home countries or are going elsewhere is increasing. Over the last five years, the U.S. attracted an average of 73,000 skilled immigrants annually, down from about 107,000 prior. While a large number, it is not enough to fuel the U.S. workforce demands. To put it into perspective, Canada attracted 56,000, Australia 20,000, and even tiny New Zealand managed to get 10,000.

The U.S. has had a confused approach to immigration and has done little to shift the balance towards attracting high-skilled talent. As a consequence, barely 22% of immigrants are high-skilled workers. Other countries typically seek to have the highly skilled workers comprise 50 percent or more of total permanent immigration. As a reference point, the most recent figure for Australia was 65 percent.

The Myths Surrounding Immigrant Labor

A big reason for lack of progress on changing immigration policies has to do with misinformation and myths surrounding immigrant labor. Special interest groups are motivated to prevent immigration for a number of selfish reasons. This protectionism prevents needed talent from entering the country.

What doesn’t get mentioned is the fact that immigrant workers make up less than 5% of the U.S. high-skilled workforce; in fields like IT, unemployment averages about 3% and wage growth has been consistent at about 3.9%. In fields like architecture and certain types of engineering, unemployment has averaged less than 2%.

These numbers undermine any claims that immigrant workers have negatively impacted employment or wages. The reasons a particular individual, despite being seemingly qualified, is struggling in finding employment is usually not because of a conspiracy among employers - it could be a case of misplaced expectations, a mismatch between the person’s skills and available jobs, an industry downturn, or just an ability to interview well.

For example, there are many extremely talented and highly qualified automotive engineers in Detroit who are out of work. This is not because their jobs were filled by lower-paid immigrants, but rather because their industry is in a tailspin, and they don’t have any other local employment options. The corollary to this example is at the low-end of the workforce where we are currently reinforcing an enormous (and expensive) fence along our border with Mexico to keep out migrant workers who enter the U.S. at great personal risk to do backbreaking and menial work that no Americans are willing to do.

Impact on Students

It isn’t just in attracting high-skilled immigrants that we’re losing out to other countries. The ability of the United States to attract foreign students is also deteriorating. The flow of students declined by about 70,000 per year after 2001, or some 25 percent, and rose elsewhere - in Australia, New Zealand, the U.K., and Canada. And this is likely to worsen as more countries wake up to the issue and decide to enter the fight.

One thing is certain, the U.S. is not the only country that needs talent to grow and innovate. The first order of business is for the U.S. to develop a coherent national policy in regards to talent. We need to develop more of our own via improved professional and skill-trades education, and we need to attract more highly-skilled immigrants.

Next, industry demands for more H-1B visas and green cards should be correlated with actual needs. That way we can be sure these talent gaps will be actively managed and matched by the U.S. government.

Ultimately, U.S. industry needs to face up to the challenge. There are many opportunities to redeploy talent (for example, re-training unemployed automotive engineers to work on green technology). There are also a large number of highly educated and skilled knowledge workers who desire greater flexibility in their work life, and still others who want to work part-time in retirement. There are also rapidly evolving talent-deployment models (like M Squared Consulting) that allow organizations to instantly access targeted expertise on a project basis rather than recruiting for full-time positions.

A recent survey reveals growing acceptance of the global economy among the workforce worldwide. According to a study conducted by staffing giant Manpower Inc. (NYSE: MAN), “Borderless Workforce,” which surveyed nearly 31,000 employers across 27 countries and territories, 31% of employers worldwide are concerned about the impact on the labor market of talent leaving their country to work abroad. A parallel study called “Relocating for Work survey” said that 37% of individuals would be willing to relocate anywhere in the world for a better career.

Additional findings of the survey show that 78% of individuals would be willing to relocate within their national borders or abroad for work and 41% of those would be willing to relocate permanently. Respondents from the Philippines (96%), Ireland (93%), Brazil (93%), Portugal (92%), Colombia (92%), Mexico and Central America (92%) and Peru (90%) were the most likely to consider relocating for employment opportunities in the future.

Respondents under 30 years old were more receptive to moving for work than their older colleagues. And the most popular destinations that people would want to relocate across borders for work are the United States, the United Kingdom, and Spain.

In previous posts I’ve talked about the U.S. immigration policy and its effect on talent supply. Even if the number of work visas is increased, the supply of new knowledge workers (e.g. college graduates with engineering or professional degrees) is already being diverted from the United States. From 2001 to 2003, applications from foreign students to American universities dropped by 26% while they increased in the United Kingdom (36%), France (30%), and Australia (13%).

They’re going elsewhere

A 2005 study by the Pew Hispanic Center revealed that temporary legal visitors (the vast majority of which are skilled workers and university students) dropped to 185,000 in 2004 from 268,000 in 2000.

There’s also a major increase of skilled workers returning to their homelands. A survey by Duke University found that one in three new immigrants holding high-tech jobs in the U.S. plans to leave. Between 10% to 50% of the R&D staff of Indian and Chinese high-tech firms are returnees from the United States. The reasons are not that hard to understand: with comparable jobs available at home, workers have fewer incentives to tolerate the long waits and uncertainty of working in the United States. This combined with the much higher cost of living in the United States and growing wage normalization across the globe means more graduates are choosing to work in their home countries.

Talent supply and demand

Compounding the problem is the fact that the supply of talent is simply not keeping up with demand. The U.S. produces the highest number of engineers per million residents of any country in the world, but that’s only about 137,000 engineers with bachelors’ degrees every year.

Supply from other countries is not sufficient to meet the global demand. In 2005, Fortune magazine estimated that China was producing some 600,000 engineers and India 350,000 annually. Unfortunately, these numbers have turned out to be suspect. A report by the McKinsey Global Institute said more than half of those “engineers” would be categorized as no more than technicians in the United States. The caliber of their education is simply not on a par with the United States.

The actual numbers are more like 351,000 for China and 112,000 for India. And that’s not likely to increase much, as it takes decades for a top-tier academic institution to get established and start producing quality talent. For example, the Indian Institutes of Technology, considered by many to be among the best in the world, can only produce 5,500 graduates every year, and this is more than 50 years after its inception.

Solutions

The answer to this part of the talent equation is very simple in theory, but much tougher in practice: we need to grow more of our own talent at the college graduate level. Furthermore, we need to nurture and retain the knowledge workers we already have employed. A key component of this nurturing and retention is to give knowledge workers the flexibility and stimulation they desire, either as full-time employees or, increasingly, as flexible workers.

Is increased immigration the solution to the U.S. talent shortage?

In the war for talent the topic of immigration has become a political hot button. On the one hand it is offered up as a solution to the lack of talent, particularly in the high technology sector. On the other hand, it is chastised as a villain taking lucrative jobs away from U.S. workers.

The truth, as always, is likely somewhere in the middle.

CEOs of many companies, particularly those in high technology, see the same pattern year after year. They desperately need to recruit high-level, foreign knowledge workers since universities in the U.S. are simply not graduating enough software programmers and computer engineers. In recent years high level executives from such tech giants as Sun Microsystems, Microsoft, 3com and Motorola have lobbied for a more generous and rational policy that would allow skilled foreign workers into the U.S. through the H-1B and L1 visa programs. Yet these efforts have so far failed to result in any significant policy changes.

Nothing seems to happen in Congress to boost the number of H-1B visas (which are 3 year non-immigrant visas that allow U.S. employers to employ foreign guest workers skilled in specialty occupations) which companies can use to obtain the skilled tech workers they need.

This year, demand was so strong for skilled foreign tech workers (especially from India, Pakistan, and China) that the U.S. Department of Citizenship & Immigration Services staggered its allocation period over one week ending April 7. Over 163,000 applications were received for just 65,000 H-1B visas. They were all gone within the first 24 hours.

While there are new attempts to fix the H-1B visa system, most experts don’t predict any changes soon. For instance, U.S. Rep. Lamar Smith (a Texas Republican) has recently proposed laws raising the annual H-1B limits from 65,000 to 195,000 in 2008 and 2009. However, in a Presidential election year and with the resulting political posturing over “illegal” immigration taking jobs from U.S. citizens the likelihood of any new immigration policy changes are not good.

The other side of the issue is that with the talent shortage becoming a global issue and increasing wage “normalization” in developing countries, many foreign workers are choosing to stay home. When you look at the cost of living differential between the U.S. and that of many developing countries it is a perfectly rational decision.

So where does that leave us?

It would appear we’re stuck with the current, dysfunctional system for at least another year, if not longer. Talent seeking companies will have to consider solutions other than increased immigration in order to find the help they need.