Countries often rely on temporary foreign worker programs to address labor shortages. Many such programs, including those in Australia, Canada, New Zealand, Singapore, South Korea, and the United States, use “closed” visas that tie workers to a single employer, channeling labor to sectors experiencing shortages. These restrictions, however, draw sharp criticism. Senator Bernie Sanders has argued that “guest workers are often locked into lower-paying jobs and can have their visas taken away… if they complain about dangerous, unfair, or illegal working conditions.” Similarly, the UN Special Rapporteur on the human rights of migrants warned that Canada’s employer-specific work permits create “a power imbalance where employers may have limited incentive to ensure decent working conditions, as workers do not have a meaningful choice of alternatives.”
Despite sustained policy attention, relatively little is known about how these restrictions shape workers’ labor market outcomes, or what happens when they are lifted. Studying this issue is challenging because it requires separating the effects of visa rules themselves from pre-existing differences between temporary foreign workers and other immigrants. Temporary workers may earn less or change jobs less often not because their visas restrict mobility, but because they differ in other ways, for example, in their skills, experience, or the types of firms willing to sponsor them. Employers that rely on temporary visas may also systematically differ from other firms.
The paper addresses this challenge using detailed administrative data from Canada that link matched employer–employee records to temporary and permanent visa histories between 2004 and 2014. The dataset covers roughly 200,000 temporary foreign workers and tracks their earnings, the firms they work for (including information such as revenue and value added), and the exact timing of visa issuance and permanent residency.
To isolate the effects of visa restrictions, the authors compare groups of immigrants with the same skill level who take the same amount of time to obtain permanent residency, but who arrive in Canada in different years. This approach effectively “matches” workers on characteristics that are otherwise hard to observe, such as skills or career trajectories, so that differences in outcomes can be attributed to changes in legal status and mobility rather than underlying differences between workers or firms. The authors begin by showing that:
- Compared to similar workers who are still on restricted visas, gaining permanent residency raises the probability of a job-to-job transition by 21.7 percentage points in the first three years after permanent residency, with the increase occurring immediately and persisting over time. Earnings rise in tandem, increasing by 5.7% within three years of permanent residency.
- When temporary foreign workers obtain permanent residency, they climb the job ladder to higher-paying firms. Firm pay premia, a measure of how much a given firm pays relative to others, holding worker characteristics constant, increase by 3.2 percentage points and account for 56% of the total earnings gain. These gains emerge quickly after permanent residency and grow over time.
- Improvements in firm pay premia are driven primarily by workers switching industries, with the largest benefits going to low-wage workers and workers from lower-income countries. Workers moving across industries experience substantially larger gains than those who stay within the same industry. Low-skilled workers see earnings increases of 12.0% compared to 1.6% for high-skilled workers, and workers from non-advantaged countries (those outside the U.S., U.K., Australia, New Zealand, and Northern and Western Europe) experience an 8.1% earnings increase compared to a 4.1% decrease for workers from advantaged countries.
Building on these results, the authors next develop a model to understand how temporary worker programs affect the broader labor market. In the model, firms decide whether to hire from the domestic workforce or recruit temporary foreign workers. Hiring a temporary worker requires submitting a costly government application that may or may not be approved—mirroring Canada’s labor market assessment process. The model captures a crucial institutional feature: domestic workers and permanent residents can search for better jobs while employed and leverage competing offers to negotiate higher pay, but temporary workers on closed visas cannot. This gives firms substantial bargaining power over temporary workers. The model also accounts for a spillover effect—when firms hire temporary workers, they reduce job openings available to domestic workers, making it harder for them to find jobs or secure better offers. Using this framework, the authors project long-run outcomes and test alternative policies, such as increasing fees for temporary worker visas or allowing free employer switching.
The model reveals the following:
- The long-term effects of permanent residency substantially exceed the short-term gains. Full integration into the domestic labor market takes roughly 15 years, with eventual increases in earnings and firm pay premia 50% larger than the effects observed three years after permanent residency.
- The model successfully replicates key patterns from the data, even those not explicitly targeted. Notably, the calibrated model reproduces the pattern wherein firms that rely more heavily on temporary foreign workers tend to pay lower wages across their entire workforce. This demonstrates the model’s ability to capture real-world labor market dynamics.
- Raising visa application fees reduces profits and output among firms that rely on temporary workers, prompting some to shift toward hiring domestic workers instead. This reallocation increases domestic output, partially offsetting the decline in the temporary worker sector, but also tightens domestic labor markets and lowers expected profits for domestic firms. With more firms competing to hire domestic workers, domestic wages rise, especially for low-wage workers, while temporary worker wages fall as demand for them declines. The policy highlights a central tradeoff: Domestic workers benefit from higher wages, while firms and temporary foreign workers bear the costs through lower profits and reduced earnings.
- Allowing temporary workers to switch employers freely causes their wages to rise sharply, as they can now search for better jobs while employed. Domestic wages fall, however, most notably for low-wage domestic workers, due to heightened labor market competition. Firm profits change little.
Policymakers face a fundamental tension: increasing visa restrictions protects domestic workers’ wages but harms temporary foreign workers and reduces firm profits, while loosening restrictions helps temporary workers but puts downward pressure on domestic wages. Understanding these tradeoffs is essential for designing temporary worker programs that balance competing interests while avoiding worker exploitation.