Regulating for Decent Work July, Geneva The impact of minimum wage adjustments on Vietnamese workers' hourly wages By Henrik Hansen, John Rand and Nina Torm University of Copenhagen

1)Overview 2)The Vietnamese Context 3)Literature 4)Data 5)Method 6)Results 7)Conclusion 2 Outline

3 1) Overview Research question: How do minimum wage changes affect earnings inequality among Vietnamese wage workers? Data: Labour Force Survey data: Econometric approach: Standard treatment approach Main results: Overall reduction in earnings inequality: a 10% point increase in the effective minimum wage leads to a 2-5% decrease in the ratio of the lowest wage percentiles to the median The rate at which the gap closes decreases as we move up the wage distribution and from the 40th percentile the results are no longer statistically significant

4 2) The Vietnamese Context The minimum wage: “the lowest rate paid to the employee who performs the simplest work in the normal working conditions and that must ensure the minimal living needs of the employees and their families” (Labour code, 2012) Minimum wages vary across ownership form, time and location The grouping and the level depends on expected economic development the following year => endogeneity Between 2011 and 2013: The real minimum wage rose by about 24% per annum The minimum/median wage ratio (the Kaitz index) increased from 44% to 60%, indicating a substantial increase in the “bite” of the minimum wage

5 Figure 1: Minimum wages - domestic firms versus FIEs ( )

3) Literature Recent meta-analyses/reviews include Belman and Wolfson (2014) on the US and Leonard et al. (2013) for the UK  Minimum wages serve to increase the earnings of those at the bottom of the income distribution => reducing wage inequality Developing country reviews e.g. Betcherman (2014)  Mix of modest negative, insignificant or small positive impacts on aggregate employment, and positive findings for the distribution of earnings and reduction of poverty On Vietnam, recent work includes Nguyen (2010; 2014) and Hansen et al. (2014) using firm data (VES) Existing studies highlight the importance of: Accounting for the endogeneity of minimum wages Correctly defining treatment and control groups Considering the dynamic effects 6

4) Data Vietnamese Labour Force Survey (LFS) data collected by the Vietnam General Statistics Office (GSO), Focus on wage-workers, since data on earned income is reported only for this segment of the workforce Variation in terms of occupation, sector and demographic characteristics help to explain changes in individual earnings related to minimum wage changes 258,349 individuals observations over the three years We use individual wages to categorize workers into “low wage”(230,837) and “high-wage” (27,512) groups But, first let’s consider whether the minimum wage is binding 7

Figure 2: Wage distribution - all workers ( ) 8 Average non-compliance rate is 8.5% (5% in 2011 and 12% in 2013) Compliance is lower in FIEs, the private sector and for informal workers Compliance is higher in State-owned enterprises (SOEs)

5) Method (i) Main challenge: establishing a counterfactual Follow the approach by Lee (1999), Bosch and Manacorda (2010) and Autor, Manning and Smith (2014) We specify a latent log-wage distribution which only differs in terms of location and scale The effective minimum wage is the log of the minimum wage/median wage in the relevant province, sector and year The difference between the observed and the latent log-wage quantiles is the identified impact of the effective minimum wage We include the squared term of the effective minimum wage, to allow for marginal effects that depend on the level of the minimum wage 9

5) Method (ii) Identifying assumptions: i.The latent log-wage distributions can be well approximated by a function from the family of location-scale distributions ii.The median log-wage in the observed distributions equals the median in the latent log-wage distribution In order to have a province level panel, the individual level data is transformed into a panel of 924 obs. over a 3-year period for each p th quantile range As robustness, we also generate districts level panels including only districts with > 100 individual worker observations per year and sector within each district => sample of 882 quantile range observations 10

6) Results: individual wage determinants 11 (1)(2)(3) Log of real minimum wage 0.314** ** (0.110)(0.776)(0.116) Gender (male=1) 0.145** (0.007) Age 0.001** (0.000) Ethnicity (Kinh=1) 0.032** (0.009) Unemployed ** (0.009) Seniority 0.124** (0.003) Second job ** (0.007) Urban 0.017** (0.012) Location, sector, time fixed effectsYes Location, sector, time interactionsNoYesNo Additional controlsNo Yes R-squared Observations258,349

6) Results: earnings inequality When fixed effects and individual wage determinants are accounted for a 10% increase in the effective minimum wage leads to a 5.1% increase in the lowest (10th) wage percentile relative to the latent distribution Sector splits show that the results are driven by the formal sector, in particular state enterprises and FIEs, whereas the wage distributions for workers in private sector firms appear to be unaffected by the minimum wage The absence of significant impacts in the upper part of the distribution serves to validate our identifying assumptions. A lack of minimum wage spill-over (“lighthouse”) effects to the informal sector which could result in decreasing wages in this sector. 12

7) Conclusion The relationship between minimum wage and individual wages is positive and robust to different levels of aggregation Minimum wages reduced earnings inequality by moving the wages at the lower end of the distribution closer to the median wage Applying the observed elasticities to the minimum wage increase that occurred in Vietnam between 2011 and 2013 (24% average yearly increase), implies a decrease in the differential between the 10th percentile relative to the median of up to 12% Wage distributions for workers in private sector firms appear to be unaffected by minimum wage changes - is this indicative of compliance issues among private domestic firms? 13

Nina Torm Thank you!