VIETNAM’S LABOR MARKET – WAGE GROWTH AND WAGE INEQUALITY

Diep Phan

CIEM-DANIDA Project

Hanoi, July 22nd, 2009

1

OVERVIEW

On-going work Goals:

Investigate changes in wage level and wage inequality in the past 25 years

Review the literature to understand the demand and supply factors leading to these changes

Provide suggestions for future research and data collection

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VIETNAM BACKGROUND Vietnam in the past 25 years:

Rapid economic growth and rapid economic integration Rising living standards and declining poverty rate Stable expenditure inequality but rising income

inequality (esp. by regional and ethnicity dimensions)

What is the role of the wage labor market in contributing to these outcomes?

What has happened to the labor market and to wages?3

1993 2006

Gini of expenditure

0.34 0.36

Gini of income

0.34 0.43

THEORETICAL & INTERNATIONAL BACKGROUND (1) Conventional trade theory:

Heckscher-Ohlin model: when a developing country (Vietnam) opens to trade there should be a decrease in the skill premium and hence a reduction in wage inequality

Logic: developing countries have comparative advantages in unskilled labor-intensive products

→ specialize in producing and exporting unskilled labor-intensive products

→ demand for unskilled labor goes up (relative to demand for skilled labor)

→ returns to unskilled labor goes up (relative to returns to skilled labor)

→ skill premium and wage inequality decrease 4

THEORETICAL & INTERNATIONAL BACKGROUND (2)

Empirical evidence from NIEs in the 1960s and 1970s tend to support this theory These countries observed a decrease in skill

premium and wage inequality as they opened up and pursued export-oriented growth strategies

But empirical evidence from Latin American and other more recent liberalizers countries in the 1980s and 1990s contradict this theory These countries observed an increase in skill

premium and wage inequality as they liberalized

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THEORETICAL & INTERNATIONAL BACKGROUND (3)

New trade theory: skill-bias technology Trade (esp. intra-industry trade) and FDI → import skill bias technologies → demand for high skilled labor ↑→ returns to high skilled labor ↑

Against this background, prior expectation about wages and wage inequality in Vietnam following liberalization is not obvious

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LABOR MARKET DATA IN VIETNAM Data on labor demand/supply and wages are

available but come from various sources with varying quality, coverage, and representativeness Some are too aggregate (Population and Housing

Census) Most have questionnaires that are insufficient for

rigorous economics analysis (LFS, census) Some are of low quality (LFS, establishment census) Some do not provide raw data (LFS, establishment

census) Some are not representative enough for the whole

economy Enterprise survey covers only the formal labor

market DANIDA’s SME survey covers only a few provinces

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LABOR MARKET DATA IN VIETNAM (CONT)

Data on labor demand by skill are especially important yet lacking

Data on the informal labor market and migration data are also lacking

The future does seem brighter; improvements are being either proposed or made in various ways The new LFS is expected to be of higher quality,

to cover the informal sector, and to collect data on labor by skills

The new VHLSS (2006 and 2008) start to include questions allowing us to identify migrants vs. non-migrants

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WAGES IN VIETNAM

In this presentation: data come mostly from VHLSS 1993, 1998, 2002, 2004, 2006

This is the only source that provide wage data by skill

Main observations: Average hourly wage ↑ Non-linear trend in wage inequality Skill premium ↑ over the entire 1993-2006

period, but trend reversed since 2002

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INCREASING WAGE

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INCREASING SKILL PREMIUM

11Wage gaps across different skill groups are wideningStudies which ran wage regressions confirm this descriptive analysis’s finding (Cong et al 2006)

BUT TREND REVERSE SINCE 2002

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Wage growth (%)

93-98 98-02 02-06 93-06No degree & primary school 29% 11% 22% 75%Lower secondary school 51% 48% -2% 120%Upper secondary school 76% 63% 1% 190%Junior College and above 159% 54% 0% 301%

NON-LINEAR TREND IN WAGE INEQUALITY

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QUESTIONS

What are the supply and demand factors that drive the observed wage trend?

What are the forces behind these supply and demand factors?

What can explain the year 2002, which seems to mark a turn around in the trend in wage inequality?

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TRACING THE LINKS

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Trade, technology, labor market policies,

etc.

Labor demand at firm and industry

levels, for different skill types

Labor supply at household

level

Wage outcomes

LABOR SUPPLY

The current literature: Plenty of descriptive studies, esp. those using

the Labor Force Survey and VLSS/VHLSS Few studies of household or individual labor

supply behavior: Edmonds and Pavcnik (2005), Tran (2008)

Main observations: Labor force has low level of skill/education Supply of skilled labor seem to be growing

But there are inconsistencies between LFS and VHLSS data

VHLSS data are probably more reliable16

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Growth in (employed) labor force by skill1997 1998 1999 2000 2001 2002 2003 2004 2005

all 0.6% 3.8% 3.2% 0.6% 1.6% 3.0% 2.5% 2.8% 2.7%elementary school and lower -5.4% 0.0%

35.1% -2.0% 7.2% 0.4% 2.7% -4.2% -1.1%

middle school -3.7% 4.3%

35.8% 3.3% -6.2% 4.9% 2.5%10.8% 4.3%

high school & vocational training 11.5% 6.8%

-55.7

% 4.1% -2.1% 5.0% 0.1% 7.2% 8.6%junior college and above 14.6%19.5%13.2% 1.6% 8.1%16.8% 9.2%15.4%10.1%

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SECONDARY SCHOOL ENROLMENT (% OF COHORT)

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1970 1980 1990 2000

Philippines 45.81 64.21 73.21 77.11

Malaysia 34.23 47.69 56.33 69.28

Vietnam .. 42.04 32.00 67.05

Myanmar 20.58 22.29 22.67 38.53

Thailand 17.42 28.79 30.10 82.77

Indonesia 16.09 29.01 44.01 56.75

Cambodia 8.24 .. 32.06 18.07

Lao PDR 3.69 20.66 25.20 37.55

Source: WDI

TERTIARY ENROLMENT (% OF COHORT)

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1970 1980 1990 2000

Philippines 16.80 24.36 28.21 30.54

Thailand 3.10 14.66 16.67 35.58

Malaysia .. 4.12 7.34 26.33

Indonesia 2.53 3.77 9.22 14.43

Myanmar 1.73 4.74 4.09 11.47

Vietnam .. 2.11 1.87 9.73

Cambodia 1.48 0.08 0.71 2.24

Lao PDR 0.17 0.44 1.29 3.22

Source: WDI

IMPLICATIONS FROM SUPPLY SIDE

Supply of skilled labor is growing Although compared with other countries in the

region, Vietnam’s skill/educational level is still very low

One potential explanation for the non-linear trend in wage inequality from the supply side Starting in 2000, the increase in the supply of skill

labor start to catch up with the demand, slowing down the increase in skill premium? (*)

(*) Thank James and Channing for the useful conversation on this topic

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LABOR DEMAND – THE CURRENT LITERATURE (1) Study factors influencing employment growth and

structure of labor demand at aggregate level Studies at the firm level almost completely

absent=> Know little about firms’ labor demand behavior;

lacking estimates of: Elasticity of labor demand Elasticity of substitution among different types of

workers Elasticity of substitution between labor and other

inputs such as energy, etc. Elasticity of substitution between workers and hours Etc.

Data on labor demand are more scarce than data on labor supply

Even more scarce are labor demand data by skill and by workers’ other characteristics

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LABOR DEMAND – THE CURRENT LITERATURE (2)

Impacts of trade and openness have received most of the attention Jenkins (2002) and Tran and Heo (2009) Export is found to contribute directly to

employment; unskilled women are special beneficiaries

But no studies on impact of trade on employment by skill types

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TECHNOLOGICAL PROGRESS AND LABOR DEMAND Impacts of technological progress on labor

demand (by skills) have been ignored The literature on TFP growth points toward the

important role of TFP growth in aggregate economic growth

But it’s unclear how much of this TFP growth is due to technological progress, and how much to other factors such as increases in input quality

Also, little has been studied on the nature of the technological progress or which factors are driving it Is technological progress in Vietnam labor or capital

savings? Is it biased toward skilled or unskilled labor? Is it driven by trade and FDI? By government

investment policies?

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CONCLUDING REMARKS (1)

We have observed: Increasing wage and skill premium overall, but

this varies depending on the period A non-linear trend in the skill premium and wage

inequality: increase from 1993-2002, but decrease from 2002-2006

From the supply side: Supply of skilled labor is growing (data

inconsistencies remain) and perhaps catching up with the demand side by 2002?

Further evidence/studies needed to confirm

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CONCLUDING REMARKS (2)

From the demand side: It is speculated that the demand for skilled labor

is rising faster than the demand for unskilled labor; evidence needed to confirm

Further studies needed to understand how much of this is due to trade and how much to technological change

More studies of the labor demand/supply are needed to: Understand the demand and supply factors that

drive the observed wage trend Understand factors that lead to changes in

demand and supply for different types of labor27

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EMPLOYMENT GROWTH AND STRUCTURE

Employment growth: not keeping up with output growth

Employment structure: not keeping up with structural change in GDP

Reason: two schools of thought Conventional view: capital-intensive, import-

substituting nature of the state sector and foreign investments (World Bank, Belser 1999)

The other view: rising labor productivity from a very low base prevents the country from generating employment (Jenkins 2004)

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2929

3030

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LABOR PRODUCTIVITY

Increasing fast, but from a very low base → still lagging far behind other countries

Industry has highest labor productivity, agriculture lowest

Service sector has slow productivity growth (this is where most of the new jobs are created)

It’s unclear how much of this growth in labor productivity is due to increase in capital intensity, and how much is due to technological progress

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Table 4.3.1: Labor productivity level

US$ per worker, current price Relative to Singapore (%)

Vietnam China ASEAN 8Vietna

m China ASEAN 8

1995 1,753

2,494 5,905 3.6 5.2 12.2

2000 2,457

3,598 6,641 4.3 6.2 11.5

2005 3,300

5,851 8,576 4.4 7.7 11.3

2006 3,617

6,802 9,212   4.5 8.4 11.3

Table 4.3.2: Labor productivity growth (%)

Vietnam China ASEAN 8 Singapore

1990-1995 5.9 11 5.1 5.5

1995-2000 4.3 7 0.5 2

2000-2006 5.1 8 2.9 2.5

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A DILEMMA

The Vietnamese government wants to promote productive and equitable employment

Dilemma: for a given increase in output, if labor productivity is increased, then the number of jobs created must be sacrificed.

Despite rapid growth in labor productivity, Vietnam’s productivity level is still very low; will take many years to catch up

In the coming years, the goal of generating productive and equitable employment will continue be a tremendous challenge