Temporary Foreign Workers and Firms: Theory and Canadian Evidence

with Till Gross and Christopher Worswick

Canadian Journal of Economics, Vol. 53 No. 3 (August 2020), pp. 871-915

Abstract:

Temporary foreign worker (TFW) programs have grown considerably in size when uncapped. We develop a simple efficiency-wage model to explain this phenomenon and examine the empirical evidence for it. We also use the model to evaluate the implications of TFW programs for domestic workers. In our framework, firms that have been unable to find domestic workers may hire TFWs at the wage previously advertised to domestic workers. Due to the lower outside option for TFWs than domestic workers, TFWs will exert more effort for the same wage. Firms would thus prefer to hire otherwise identical TFWs rather than domestic workers. Our model identifies an unintended consequence of a TFW program: since the repercussions of a failed domestic job search are less severe if a TFW may be hired instead, firms have an incentive to lower their wage offers made to domestic workers. Using Canadian data, we find that, relative to domestic workers, TFWs work longer hours, have lower rates of absenteeism and are less likely to be laid off, consistent with higher effort in our model. Moreover, for TFWs from home countries with a relatively high outside option, effort is lower than for TFWs from other countries.

Published article

Older version:  Centre for Research and Analysis of Migration (CreAM) Discussion Paper, 2016.

  CLEF Working Paper No. 6, Fall 2016