The minimum wage increase speed in Vietnam is higher than the labor productivity growth rate.
Acccording to a report from Vietnam Institute for Economic and Policy Research, VEPR at the workshop "Wages and Labor Productivity in Vietnam", co-organized by VEPR in cooperation with The Japan International Cooperation Agency (JICA) on September 13, this status shall slowly break the economic balance on many aspects, especially reducing the motivation of investors, corporate profits and the competitiveness.
Minimum wage exceeding GDP
Annual average minimum wages increase at double digits between 2007 and 2015, exceeding GDP per capita and consumer price index.
Ho Chi Minh city, Vietnam
The VEPR report shows that the minimum wage rate on labor productivity has increased rapidly, from 25% in 2007 to 50% in 2015. This trend is not the same as in other countries such as China, Indonesia or Thailand. The gap between minimum wage growth and productivity growth in Vietnam has widened more rapidly than in other countries.
From 2007 to 2015, average wages in Vietnam increased by 1.5 times (double the increase amount in 2004-2015). Average wages increase rapidly to 2010 but slow down significantly in the period 2010-2014, reflecting the slowdown in economic growth.
In addition, payments for insurance, including social insurance, health insurance and unemployment insurance, also increased over time. In 2017, minimum costs incurred by businesses in Vietnam are equal to the minimum wage and contributions to insurance (including social insurance, health insurance, unemployment insurance) nearly the same as in Thailand, and higher than in Indonesia. "In case benefits from these contributions are not recognized by the employee, the large insurance premium in Vietnam can create" tax wedges "between the labor costs that businesses incur with their actual incomes", Mr. Nguyen Duc Thanh, director of Vietnam Institute for Economic and Policy Research (VEPR) said.
Apply salary due to the working time
Chief Representative of JICA Vietnam Office, Mr. Fujita Yasuo, said that the increase in salary without labor productivity increase will resulting to higher cost and competitiveness reduction. He recommends that Vietnam should pay attention to the prognosis mechanism and adjust the minimum wage accordingly.
Secondly, the minimum wage does not play an effective role if it is formulated as a social protection policy. It should be covered by other policy instead of depending on minimum wage policy.
Thirdly, the minimum wage is currently calculated on a monthly basis which should gradually move to the working hour basis. This ensures that those who work by the hour or by the day can fully enjoy their rights and at the same time allow employers to be more flexible in employing labor.
Fourthly, the minimum wage must be rule-based adjustment, and therefore more transparent and predictable. For example, criteria should be defined to establish and adjust minimum wages and adjustments must be planned in line with overall economic growth, inflation and economic situation. A clear rule-based approach will increase predictability and transparency, avoiding arbitrarily adjusting, causing concern for investors and employers.
In addition to the tripartite participation in the National Wage Council (government, central employers' representatives, and central employee’s representatives), the Council should have more involvement by macroeconomic and labor economics experts, who can evaluate impact of minimum wages on employment and income before / after minimum wage adjustments. According to Mr. Fujita Yasuo, this is quite common in some countries in the region, such as Japan, Indonesia and Malaysia.
Sixthly, the impact of the minimum wage increase should be made more frequently with up-to-date data. The government may also develop additional tools to monitor productivity gains in different economic sectors and regions. "Combining these recommendations, we think it is time for Vietnam to have a productivity monitor and development agency for the whole economy. Without a solid improvement of productivity, the minimum wage increase effort will gradually diminish the competitiveness of the economy, leading to greater unemployment. Therefore, the Government should select the goal of promoting productivity as a top priority in the medium and long term. A special agency should be established and dedicated to this mission, from mindset changes to studying and developing productivity models of Japan, Singapore, Israel, etc. " Chief Representative of JICA Vietnam Office said.