VIETNAMESE LABOR DEMAND:EVIDENCE AND ISSUES

Philip Abbott Finn TarpCe Wu UNU-WIDER, Helsinki and

Purdue University University of Copenhagen

CIEM, Hanoi July 2010

July 1, 2010

Vietnamese Labor Demand:Evidence and Issues

Labor demand adjustments were necessary in WTO modeling work

CIEM has longstanding interest in labor constraints on economic growth and development

Literature on sluggish labor demand and high capital intensity of transforming economy Recent focus on structural transformation by MOLISSA

Purpose of this session: Define research agenda on labor outcomes as a result of alternative development strategies

Labor Market Issues

While Vietnamese economic growth has been rapid, reaching over 8% per annum during 2005-07, and previously from 1992-97, employment growth has been more sluggish, averaging 2.1% from 1992-97 and 2.2% from 2005-2007

Demand for unskilled labor may have been stagnant, but some believe shortages of highly skilled labor may have constrained growth in the past, or may constrain growth in the future

Goal is to understand past labor market dynamics to shed light on likely future trends and constraints Data is more readily available to examine first issue

Explaining “stagnant” labor demand? Structural transformation – moving labor out

of agriculture and into industry Shifting from low productivity to high productivity

sectors Underemployment in agriculture

Capital intensive development? Minimum wage distorts wage-rental ratio State and foreign investment overly capital intensive

Technical change TFP or labor saving? Traditional versus modern technologies

Skilled labor constraints?

Wages vary across sectors, enterprise types – labor is not homogeneous

Human capital as part of labor endowment

Investments in training? State and foreign enterprises pay higher

wages Well above minimum wage

Preliminary evidence

Preliminary evidence

Economic growth and labor trends Productivity over time and across

sectors Modeling experience

Data limitations

GDP and growth - Recent

Growth accelerated from 2000-2004 at 7.2% To 8.4% from 2005 to 2007 Slowing to 6.2% in 2008, projected 4.8% in

2009 Inflation increased over decade to over 8%

from 2004, 21% in 2008 Recession has reduced inflationary

pressures, 4.8% in 20092000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Growth rate (Real GDP) 6.79 6.89 7.08 7.34 7.79 8.44 8.23 8.48 6.2 4.8GDP per capita ($) 402 440 492 553 636 722 835 1041 1035Inflation 1.9% 4.0% 6.7% 8.2% 8.2% 7.3% 8.2% 21.7 4.8

Labor

Employment was growing more slowly than GDP Urban unemployment rate falling Most rapid growth in foreign invested sector – from small

share SOE employment stagnant

Wages increasing rapidly, especially in state sector

2008 GDP slowdown will ultimately impact employment

2000 2001 2002 2003 2004 2005 2006 2007Employment growth 2.5% 2.5% 2.7% 2.5% 2.3% 1.9% 1.9% State 2.9% 4.1% 7.6% 1.8% -1.7% -2.2% 0.7% Private 2.3% 1.9% 1.7% 2.1% 2.3% 1.9% 1.6% FI 20.0% 31.6% 31.4% 22.8% 18.9% 17.7% 15.5%

Urban unemployment 6.42 6.28 6.01 5.78 5.6 5.31 4.82 4.64

State Wages 1.0 1.12 1.26 1.47 1.67 1.93 2.28 2.43 Agriculture 1.0 0.87 1.09 1.45 1.84 1.66 1.80 2.06 Manuafcturing 1.0 1.10 1.23 1.38 1.62 1.82 2.11 2.20 Service (trade) 1.0 1.09 1.28 1.50 1.66 2.05 2.21 2.40

GDP and employment - history

Vietnam not so different from other Asian countries

World Bank had it wrong in 1999 when it suggested labor demand kept up elsewhere in Asia Especially large productivity gains in China Comparable elsewhere when at low GDP levels!

Productivity growth = real GDP growth – employment growth

1986-90 1991-95 1996-2000 2001-05 2006-08China 5.7 11.0 7.5 8.6 10.5Korea, Rep. 6.4 5.6 3.4 3.4 3.5Thailand 7.7 8.3 -0.4 3.4 3.1Indonesia 4.6 5.5 -1.9 2.7 4.2Philippines 2.0 -0.9 1.7 2.0 3.3Vietnam 2.7 6.4 4.7 5.7 5.0

Huge Productivity differences across sectors

Productivity growth in All sectors- erratic but similar

2/3 of overall productivity growth explained by sectoral shifts

Nevertheless, over 2% productivity growth in modern sectors

2000 2005 2007 2008 Growth 2000-07

Value added per worker 7,276 9,242 10,444 10,906 5.2%

State 31,854 39,575 45,095 45,985 5.0%

Private 3,929 4,972 5,703 6,031 5.3%

Foreign investment sector 79,203 41,888 39,285 39,596 -10.0%

Agriculture and forestry 2,428 2,926 3,183 3,339 3.9%

Mining and quarrying 72,048 66,981 55,104 48,852 -3.8%

Manufacturing 14,504 17,022 19,083 19,840 3.9%

Electricity, gas and water supply 76,626 74,287 68,452 66,336 -1.6%

Construction 19,852 17,223 18,906 17,841 -0.7%

Wholesale and retail trade 11,457 12,963 14,274 14,965 3.1%

Hotels and restaurants 12,931 17,553 20,993 22,338 6.9%

Transport, storage and communications 9,137 12,678 15,437 17,407 7.5%

Financial intermedation 75,133 52,444 45,979 46,756 -7.0%

Scientific activities and technology 83,564 96,653 101,784 108,030 2.8%

Real estate, renting and business 191,408 97,860 73,481 64,684 -13.7%

Public administration and defence; compulsory social security21,327 16,158 15,363 14,966 -4.7%

Education and training 9,207 10,640 11,408 11,932 3.1%

Health and social work 17,491 15,680 17,101 17,801 -0.3%

Structural transformation underway

SectoralShares

MOLISSA, 2010 cites slow restructuring!

Industry and Services both growing

SectoralShares

Under employment in rural areas Underemployment in rural agriculture

means agriculture productivity growth may be understated

2008General Urban Rural

Unemployment rate 2.38 4.65 1.53

Underemployment rate 5.10 2.34 6.10

Minimum wages grow nearly as fast as GDP , slower than state wages

Vietnam Development Report, 2008

Wages kept up with CPI

0

20

40

60

80

100

120

140

160

180

1986 1990 1994 1998 2002 2006 2010

Inde

x, 2

005=

100

CPI Wages Real wages Unit labor cost

Economist, Economist Intelligence Unit Country Data (2010)Economist real wage estimates “suspicious” - constant

Wages growing, fastest in State and FDI sectors

Private wages growing Household income looks like agriculture

Table 1.3: Average monthly wages 1998-2006

Form of ownership

Average monthly salary of a worker, 1000

VND

Annual

growth rate

per cent 1998 2002 2004 2006

Households 552 606 649 664.2 2.34

Private and collective 554 771 852 935.5 6.77

State 572 1002 1077 1,103 8.55

Foreign investment 680 1037 1044 1,316 8.60

Wage gap between FDI and

household sectors 1.2 1.7 1.6 1.98

Source: GSO, VHLSS 1998 - 2006

Skill level (Human capital) increasing

Table 1.1: Structure of labour force by professional level, %

Source: Annual labour - employment statistics, MOLISA (2000 - 2007), GSO (2008)

By professional level Annual growth

rate Structure 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total 100 100 100 100 100 100 100 100 100 2.5

Unskilled workers

86.4 84.4 82.0 79.7 77.4 75.0 72.7 70.3 68.0 -0.5

Elementary 3.0 4.6 6.3 8.0 9.7 11.4 13.1 14.8 16.5 25.5

Vocational training

2.0 2.1 2.4 2.7 3.0 3.3 3.6 3.9 4.2 13.0

Professional secondary

4.6 4.65 4.7 4.75 4.75 4.8 4.85 4.9 4.9 3.4

College, University and higher

4.0 4.3 4.6 4.9 5.2 5.5 5.8 6.1 6.4 8.7

Modeling Lessons

Investment and Trade – Lessons from Modeling

Strong institutional biases in investment allocation Government invests in infrastructure, SOE equity

Targets specific sectors, mobilizes savings State impacts biggest for energy

Foreign invested firms emphasize manufacturing, ag exports Private firms emphasize agriculture, services

Differing economic impacts SOEs show somewhat greater GDP impact Private firms demand more unskilled labor, generate more wage

income SOEs have lowest labor demand impact (energy) FI firms generate lowest wage income increases, least labor

intensive

Labor demand

“LFP” assumptions critical to getting this close Assumed firms reduce use of unskilled labor

more so than skilled labor Pressure seems greatest after LFP on

educated workers, before LFP on unskilled labor demand

Base excess skilled labor demand persists Rural income shares declining

Urban wage income shows biggest increase

Labor demand

2000 2001 2002 2003 2004 2005 2006 2007

Employment (GSO)

37,610

38,563

39,508

40,574

41,586

42,527

43,339

44,172

Labor demand

42,358

42,538

43,287

44,961

46,663

46,885

46,904

48,887

Educated 1,636

1,712

1,807

1,924

2,057

2,157

2,261

2,449

Technical 5,633

5,880

6,202

6,615

7,044

7,367

7,680

8,363

Unskilled 35,088 34,945 35,279 36,422 37,562 37,360 36,963 38,075

Labor Supply

40,417

47,144

Educated 1,741

2,228

Technical 5,995

8,894

Unskilled 32,680

36,022

ICORs, Labor requirements and TFP growth

ICOR based on GSO output and investment data Labor-output ratio based on employment data ICOR is erratic but falling, after rising

Surge in 2007 investment may lead to final jump

Both Labor and Capital requirements falling TFP growth W/R increasing less labor intensive techniques (to 2004) Literature has been inconclusive on extent of TFP growth Labor biased technical change, also intermediate demands?

Labor-output ratio fell over 7%/year from 2000 to 2007, State manufacturing wages grew 12%/year

FDI & Foreign Savings – Macro Outcomes Large GDP declines with lost investment

Much smaller impact on consumption Current account improves, but not as much as financial

account declines Realistic devaluation scenario has GDP reduction cut in half

Labor impacts small, bigger for INV than FDI, especially for unskilled labor FI sectors used least labor

Scenario: FDI INV DEV DEV pteActual Predicted Diff. Diff. Diff. Diff.

GDP 1144 1113 1079 -3.1% 1071 -3.9% 1144 2.7% 1091 -2.0%Consumption 742 759 758 -0.2% 756 -0.4% 780 2.8% 762 0.3%Current account -113 -168 -137 -18.5% -130 -22.6% -82 -51.4% -115 -31.5%Financial account 282 282 214 -24.2% 56 -80.2% 56 -80.2% 56 -80.2%Labor demand 46,114 48,887 48,759 -0.26% 48,589 -0.61% Educated 2,154 2,449 2,442 -0.28% 2,435 -0.60% Technical 8,490 8,363 8,337 -0.31% 8,310 -0.63% Unskilled 35,470 38,075 37,980 -0.25% 37,844 -0.61%

2007

Lessons Learned – Labor and Income Labor –output ratios declining significantly

Vietnam wants to “move up value chain” Biased technical change a critical adjustment – “LFP”

Need better information on this Labor surpluses not yet exhausted, but…

Expected skilled labor demands to become tighter sooner than for unskilled labor

Wages growing faster than productivity & inflation FDI change had smaller labor effects than overall

investment changes – less labor intensive Very small changes in income distribution

WTO helped urban wage labor, hurt rural areas

Labor Research Agenda

Labor Research Agenda

Growth accounting and structural transformation How far does structural transformation get us? Why doesn’t model pick this up? What fixes are necessary?

Technical change TFP growth evidence is inconclusive Labor-saving biased technical change?

Price incentives and capital intensity Minimum wage Strong wage growth, above minimum wage Institutional investment allocation

Constraints from skilled labor? Human capital or specific skills?

Data issues

Skill demand issue is important, but it has been very difficult to get data to examine that

Use of household survey (VHLSS) for wage differentials, skills distributions (based on education)

Recent GSO labor survey (replacing MOLISSA) still focuses on quantity, not skills or wages