Vietnam’s Labor Market – Wage Growth and Wage Inequality

1. Vietnam’s Labor Market – Wage Growth and Wage Inequality Diep Phan CIEM-DANIDA Project Hanoi, July 22nd, 2009

2. 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

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. Increasing Wage

11. Increasing Skill Premium Wage gaps across different skill groups are widening Studies which ran wage regressions confirm this descriptive analysis’s finding (Cong et al 2006)

12. But trend reverse since 2002

13. Non-linear Trend in Wage Inequality

14. 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?

15. Tracing the links Trade, technology, labor market policies, etc. Labor demand at firm and industry levels, for different skill types Labor supply at household level Wage outcomes

16. 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 reliable

20. Secondary School Enrolment (% of cohort) Source: WDI

21. Tertiary Enrolment (% of Cohort) Source: WDI

22. 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

23. 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

24. 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

25. 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?

26. 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

27. 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 labor

28. 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) 28

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32. 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

36. 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