The Economic Consequences of a Low-Skilled Immigration Sudden Stop: Evidence From Korea’s Guest Worker Programme

Why It Matters

The findings reveal that abrupt limits on low‑skill migration can destabilise firms and depress native wages, challenging policies that assume domestic hiring will offset immigrant losses. This has direct relevance for ageing economies facing similar labour shortages.

Key Takeaways

• EPS worker stock fell 22% during pandemic
• High EPS‑dependent firms faced higher closure rates
• Surviving firms shifted Korean workers to manual tasks
• No increase in domestic hiring observed
• Short‑run immigration cuts hurt productivity and wages

Pulse Analysis

Labour shortages in entry‑level, manual jobs have become a persistent concern for advanced economies, prompting many governments to tighten low‑skill immigration rules. South Korea’s Employment Permit System, introduced in 2004, channels temporary foreign workers into small and medium‑sized manufacturers that struggle to fill physically demanding positions. When COVID‑19 forced border closures, the EPS workforce shrank from roughly 276,000 to 217,000, creating a sudden negative supply shock that offers a rare empirical window into firm‑level adjustments.

The research shows that firms with higher pre‑pandemic EPS reliance were significantly more likely to exit the market in 2020‑21, and those that survived recorded deeper revenue declines and production disruptions. Crucially, these firms did not compensate for the loss by hiring more Korean workers; instead they retained existing staff and reassigned them to the basic tasks previously performed by migrants, often at reduced wages. This internal reallocation underscores the complementary role that low‑skill immigrants play in production chains, rather than serving as a simple substitute for native labour.

Policy implications extend far beyond Korea. In ageing societies across Europe and North America, where the pool of young domestic workers is shrinking, abrupt immigration restrictions risk triggering similar productivity losses, firm closures, and wage pressures on native employees. While firms may eventually adapt through automation or organisational change, the short‑run costs are tangible and can undermine the very workers policymakers aim to protect. A nuanced approach that balances immigration controls with labour‑market flexibility is therefore essential for sustaining manufacturing competitiveness and safeguarding domestic employment.