Nationalistic Labor Policies Hinder Innovation

Hiring restrictions for high-skilled foreign nationals hinder domestic firms’ production of cutting-edge innovation. We document this fact using the Employ American Workers Act (EAWA), which banned US financial institutions participating in the Troubled Asset Relief Program (TARP) from hiring new high-skilled foreign nationals until the full repayment of TARP funding. We exploit the differential pre-crisis exposure of similarly-troubled TARP institutions to the unforeseen EAWA ban to show that the ban did not only hindered new foreign hires but also reduced the quantity and quality of patents filings, especially in fields such as FinTech, cybersecurity, and payment systems. In terms of labor market implications, instead of replacing new high-skilled foreign nationals with domestic employees—the stated goal of EAWA’s proponents— banks paid higher wage premia to retain pre-crisis foreign hires relative to the prevailing wages of US workers in the same occupations and locations.