Low-Skilled Immigration: Complementarity, Technology Adoption, and Output Mix Adjustments
New firm-level evidence directly tests the substitution hypothesis — what happens to firms and native workers when low-skilled immigrant labor abruptly disappears — and it comes down on the complementarity side.
Korea's guest-worker sudden stop: firms did not replace missing immigrants with natives (NBER w34927)
Jongkwan Lee, Giovanni Peri, and Hee-Seung Yang, The Effects of a Sudden Stop in Low-Skilled Immigration: Evidence from Korea's Guest Worker Program (NBER Working Paper 34927), exploit South Korea's COVID-19 border closure, which halted nearly all new visa issuances under the Employment Permit System (EPS) in 2020–21. The EPS workforce — ~276,000 workers in 2019, ~75% in manufacturing, 79% performing tasks employers classified as requiring no specific knowledge or technical skill — shrank by about 22% from 2019 to 2021. Using policy-driven variation in firms' pre-pandemic reliance on EPS workers across ~1,000 EPS-participating manufacturing firms (Korea Development Institute / World Bank surveys, August 2019 and January 2021), the NBER digest summarizes:
"A sudden halt in South Korea's low-skilled guest worker program led to firm closures, production disruptions, and wage declines for native Korean workers."
Key results:
- Firm exit: "A shift from zero to full EPS exposure was associated with an increase of more than 12 percent in closure probability1, more than twice the baseline exit rate" — concentrated among low-wage, low-productivity firms (bottom wage quartile: ~0.4pp higher closure probability per 1pp of exposure; no significant effect in the upper half).
- No substitution toward native hiring: "Crucially, firms did not respond by expanding domestic hiring. While there was some increase in overall Korean employment through retention of incumbent workers, new hiring of Korean workers showed no significant increase." Firms instead wanted more guest workers — each unit decline in EPS employment was associated with demand for roughly two additional guest workers.
- Native wage effects were negative, not positive: "Korean employees at surviving firms that were heavily dependent on EPS workers experienced significant wage declines, a finding consistent with native workers being reassigned to lower-skilled tasks previously performed by immigrant workers. This occupational downgrading suggests that EPS and Korean workers performed distinct and complementary roles within the production process."
What this does and does not establish
This is among the cleanest firm-level tests to date of the claim that low-skilled immigration displaces native workers, because the supply shock was abrupt, policy-driven, and large (−22%), and the design compares firms by pre-existing reliance rather than by post-hoc location choice. Its finding — natives were not hired into the vacated tasks, and exposed natives saw wage declines via occupational downgrading — aligns with the U.S. enforcement literature's "complementarity trap" (Immigration Enforcement: Native Employment Impacts and the Complementarity Trap) and with the demand-shock evidence in The Labor Supply Curve is Upward Sloping: The Effects of Immigrant-Induced Demand Shocks.
Caveats before generalizing: it is a working paper (not yet peer-reviewed); the setting is Korea's EPS — a quota-limited, manufacturing-concentrated program in a rapidly aging economy — which may bound its relevance to U.S. sectors like construction, agriculture, and hospitality; and the 2020–21 border closure coincided with pandemic demand shocks, though reliance-based identification is designed to be robust to common shocks.
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An instance of Restricting low-skilled immigration collapses the firm-level production scale that supports native jobs. — When the guest-worker flow stopped, exposed firms closed and surviving natives took wage cuts through occupational downgrading — capacity collapsed instead of transferring to natives. ↩︎