Transcript Labor demand

VIETNAMESE LABOR DEMAND:
EVIDENCE AND ISSUES
Philip Abbott
Finn Tarp
Ce 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 2009
2000 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 4.8
GDP per capita ($)
402
440 492 553 636 722 835 1041 1035
Inflation
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
2.5%
2.9%
2.3%
20.0%
2002
2.5%
4.1%
1.9%
31.6%
2003
2.7%
7.6%
1.7%
31.4%
2004
2.5%
1.8%
2.1%
22.8%
2005
2.3%
-1.7%
2.3%
18.9%
2006
1.9%
-2.2%
1.9%
17.7%
2007
1.9%
0.7%
1.6%
15.5%
6.42
6.28
6.01
5.78
5.6
5.31
4.82
4.64
1.0
1.0
1.0
1.0
1.12
0.87
1.10
1.09
1.26
1.09
1.23
1.28
1.47
1.45
1.38
1.50
1.67
1.84
1.62
1.66
1.93
1.66
1.82
2.05
2.28
1.80
2.11
2.21
2.43
2.06
2.20
2.40
Employment growth
State
Private
FI
Urban unemployment
State Wages
Agriculture
Manuafcturing
Service (trade)
GDP and employment - history
GDP growth
12
Employment growth
10
Labor force growth
8
in Agriculture
6
In Industry and services
4
2
0
1986
-2
1990
1994
1998
2002
2006
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
China
Korea, Rep.
Thailand
Indonesia
Philippines
Vietnam
1986-90
5.7
6.4
7.7
4.6
2.0
2.7
1991-95 1996-2000
11.0
7.5
5.6
3.4
8.3
-0.4
5.5
-1.9
-0.9
1.7
6.4
4.7
2001-05
8.6
3.4
3.4
2.7
2.0
5.7
2006-08
10.5
3.5
3.1
4.2
3.3
5.0
Huge Productivity differences across sectors
25000
Value added per worker
20000
based on labor force
Agriculture
15000
Industry
Services
10000
5000
0
1986
1990
1994
1998
2002
2006
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
8
6
4
2
0
1986
1990
1994
1998
2002
2006
-2
-4
Productivity growth
Agriculture
Industry
Services
2000
2005
2007
2008
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%
79,203
41,888
39,285
39,596
-10.0%
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
21,327 social
16,158
security
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%
Value added per worker
Foreign investment sector
Agriculture and forestry
Growth 2000-07
Structural transformation underway
70
60
50
Sectoral
Shares
Agriculture
40
Fishing
Industry
30
Services
20
10
0
2000
2002
2004
2006
MOLISSA, 2010 cites slow restructuring!
2008
Industry and Services both growing
30
25
Industry
20
Manufacturing
Sectoral
Shares 15
Construction
Services
Trade
Transport
10
Education & health
5
0
2000
2002
2004
2006
2008
Under employment in rural areas

Underemployment in rural agriculture means
agriculture productivity growth may be understated
General Urban Rural
2008
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
180
160
Index, 2005=100
140
120
100
80
60
40
20
0
1986
1990
CPI
1994
Wages
1998
Real wages
2002
2006
Unit labor cost
Economist, Economist Intelligence Unit Country Data (2010)
Economist real wage estimates “suspicious” - constant
2010
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, %
Total
100
100
100
100
100
100
100
100
100
Annual
growth
rate
2.5
Unskilled
workers
Elementary
86.4
84.4
82.0
79.7
77.4
75.0
72.7
70.3
68.0
-0.5
3.0
4.6
6.3
8.0
9.7
11.4
13.1
14.8
16.5
25.5
2.0
2.1
2.4
2.7
3.0
3.3
3.6
3.9
4.2
13.0
4.6
4.65
4.7
4.75
4.75
4.8
4.85
4.9
4.9
3.4
4.0
4.3
4.6
4.9
5.2
5.5
5.8
6.1
6.4
8.7
By professional level
Structure
Vocational
training
Professional
secondary
College,
University and
higher
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Annual labour - employment statistics, MOLISA (2000 - 2007), GSO (2008)
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?
1.6
1.4
Labor-output ratio
1.2
1
Wages - State Manf
0.8
W/R
0.6
Incremental Capital output ratio
0.4
Interest rate - Lending
0.2
0
2000
2001
2002
2003
2004
2005
2006
2007
Labor-output ratio fell over 7%/year from 2000 to
2007, State manufacturing wages grew 12%/year
1.6
1.4
Labor-output ratio
1.2
1
Wages - State Manf
0.8
W/R
0.6
Incremental Capital output ratio
0.4
Interest rate - Lending
0.2
0
2000
2001
2002
2003
2004
2005
2006
2007
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:
GDP
Consumption
Current account
Financial account
Labor demand
Educated
Technical
Unskilled
2007
Actual Predicted
1144
1113
742
759
-113
-168
282
282
46,114
48,887
2,154
2,449
8,490
8,363
35,470
38,075
FDI
1079
758
-137
214
48,759
2,442
8,337
37,980
INV
Diff.
-3.1%
-0.2%
-18.5%
-24.2%
-0.26%
-0.28%
-0.31%
-0.25%
1071
756
-130
56
48,589
2,435
8,310
37,844
DEV
Diff.
-3.9%
-0.4%
-22.6%
-80.2%
-0.61%
-0.60%
-0.63%
-0.61%
1144
780
-82
56
DEV pte
Diff.
2.7%
2.8%
-51.4%
-80.2%
1091
762
-115
56
Diff.
-2.0%
0.3%
-31.5%
-80.2%
Lessons Learned – Labor and Income

Labor –output ratios declining significantly



Labor surpluses not yet exhausted, but…




Vietnam wants to “move up value chain”
Biased technical change a critical adjustment – “LFP”
 Need better information on this
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



Technical change



TFP growth evidence is inconclusive
Labor-saving biased technical change?
Price incentives and capital intensity




How far does structural transformation get us?
Why doesn’t model pick this up? What fixes are necessary?
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