VIETNAMESE LABOR DEMAND: EVIDENCE AND ISSUES Philip Abbott Finn Tarp Ce Wu UNU-WIDER, Helsinki and Purdue University University of Copenhagen CIEM, HanoiJuly 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 , and previously from , employment growth has been more sluggish, averaging 2.1% from and 2.2% from  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

 Economic growth and labor trends  Productivity over time and across sectors  Modeling experience  Data limitations

GDP and growth - Recent  Growth accelerated from 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 2009

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

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

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

Structural transformation underway Sectoral Shares MOLISSA, 2010 cites slow restructuring!

Industry and Services both growing Sectoral Shares

Under employment in rural areas  Underemployment in rural agriculture means agriculture productivity growth may be understated 2008 GeneralUrbanRural Unemployment rate Underemployment rate

Minimum wages grow nearly as fast as GDP, slower than state wages Vietnam Development Report, 2008

Wages kept up with CPI 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

Skill level (Human capital) increasing

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 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 Unskilled35,08834,94535,27936,42237,56237,36036,96338,075 Labor Supply 40,417 47,144 Educated1,741 2,228 Technical5,995 8,894 Unskilled32,680 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

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

 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