The Effects of a Sudden Stop in Low-Skilled Immigration: Evidence from Korea’s Guest Worker Program

As workforces in high-income countries age and shrink, immigrants increasingly fill entry-level, low-skilled jobs. We examine what happens when this labor supply is abruptly reduced, exploiting South Korea’s sudden suspension of its low-skilled guest worker program following the 2020 COVID-19 border closure. Using policy-driven variation in firms’ pre-pandemic reliance on immigrant labor, we show that the collapse in inflows led to a significant increase in firm exit. Among surviving firms, greater pre-pandemic dependence on immigrant workers resulted in production disruptions and operational delays. Firms did not respond by expanding domestic hiring to replace missing guest workers. Instead, they adjusted by reallocating incumbent Korean employees toward lower-skilled tasks, contributing to occupational downgrading and significant wage declines. These findings suggest that low-skilled immigrant workers were not easily substitutable in the short run and that tighter immigration constraints can impose substantial adjustment costs on both firms and native workers.