Photo: Ngoc Lan
To keep firms competitive minimum wage needs to balance with labor productivity.
by Ngoc Lan
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Labor productivity has been increasing at a relatively fast pace over the years, according to the Vietnam Annual Economic Report 2018 which is entitled "Understanding the Labor Market for Productivity Enhancement." It was released by the Vietnam Institute for Economic and Policy Research (VEPR) on May 8.
The report noted that Vietnam's average labor productivity increased from VND38.64 million ($1,700) per worker in 2006 to VND60.73 million ($2,650) per worker in 2017, with significant variations in growth over the years.
From 2008-2016, the sectors with high labor productivity were mining, production and distribution of electricity and gas; banking and insurance; professional scientific and technological activities; real estate; and water supply. In particular, the processing and manufacturing industry had low labor productivity and the agriculture, forestry and fisheries sector was still one of the sectors with the lowest labor productivity in the economy.
However, VEPR Director Mr. Nguyen Duc Thanh said that wages in Vietnam are growing faster than labor productivity. Specifically, the minimum wage rate for labor productivity increased sharply from 25 per cent in 2007 to 50 per cent in 2015. The labor productivity growth rate reached only 4.96 per cent from 2004-2015, but the average wage increased by 6.67 per cent.
“Having faster wage growth rates than labor productivity growth rates will corrode corporate profits, slow capital accumulation, and businesses will not expand production to attract labor,” Mr. Thanh affirmed.
According to the report, minimum wage adjustments should be in line with labor productivity growth. Minimum wage has been increasing at such a high level over the past decade. Increasing the minimum wage is likely to have a greater negative effect on employment. More importantly, it will erode Vietnamese firms’ competitiveness if minimum wage continues to increase faster than productivity.
Minimum wage doesn’t appear to be effective if it’s considered as a social protection policy. Complementary policy should be considered as the current minimum wage system doesn’t cover those without labor contracts and those who are more vulnerable and disadvantaged. It’s worth considering complementary policies to function as social security for those who are not covered by minimum wage policy.
- economic growth
- labor productivity