I took the implication to be that GP already had a good employee who was hired legitimately under the terms of the H1B, but that, to convert to a green card, you have to see whether a US person could do the job. So you have to put out for interviews to see, but you don’t have to act on that information.

If the interview process yields a US person equally qualified, GP can’t (and doesn’t) certify the guest worker’s green card application. But that doesn’t mean they have to fire them and send them home early: they can let the guest worker work out their contract if they want to (which they probably do, it probably pays well compared to other options). And an experienced, already-trained, good employee is probably more valuable to the business than an immediate, unplanned new hire anyway.

So yes, certainly screwed up incentives—but I don’t see how it would be better to require guest workers to put their jobs in immediate jeopardy just to apply for permanent residency.

exactly that. you actually want/need a few years of warning if your greencard is going to be accepted or not. having to put out a ghost job in order to find out if the greencard is going to be accepted is really the problem (for the ghost candidate)

No, you're missing the point.

To extend the visa they have to swear they couldn't find a citizen to do this job, and aren't willing to lie.

(this clarified the situation for me, thank you)

Caste systems are extremely convenient.