The myth and mystery of Vietnam's economic and labor demand growth

Ce Wu, Purdue University

Abstract

During the past decade, Vietnam has been one of the fastest growing economies in the world, but employment growth has been much slower. The large gap between GDP and employment growth implies real labor productivity growth, so greater per capita income. However, this enlarging gap, together with emerging unemployment and underemployment problems, also indicates limited benefits to employment from output expansion, an issue of concern to Vietnamese policymakers. This dissertation research addresses the relationship between GDP growth and employment growth. The central question is why labor demand in Vietnam grows so much more slowly than GDP. Three fundamental causes proposed to explain slow employment growth are: 1) structural transformation; 2) labor-saving technological progress; and 3) institutional biases due to minimum wage and state investment policies. A decomposition of labor demand growth shows that structural transformation and state investment bias can at most explain 40% of the difference between GDP and employment growth, while the remaining 60% is due to biased technological change and minimum wage bias. Further analysis breaks apart these effects due to changing sectoral output structures and declining labor-output ratios, respectively. Productivity growth prevailed in Vietnam over the past decade, but we need to allow for biased technological change to find it. Biased technological progress is more important than all other factors in affecting labor demand growth. For the entire economy, the Leontief production function best fits the data, and estimates suggest a 5% increase in labor productivity and a 1% increase in capital productivity per year during 2000-2009. The traditional agricultural sector also experienced 3% annual growth of labor productivity accelerating the structural transformation process. State investment bias has slowed labor demand growth by 0.51% per year. Privatization is beneficial to labor demand growth as a result of higher labor intensity in non-state firms relative to state owned enterprises, and robust growth of the domestic private sector. Minimum wage bias is not an important contributing factor, due to low elasticities of factor substitution and weak links between minimum and market wages. Tighter regulation of the minimum wage policy will only strongly affect labor demand in the formal agricultural and manufacturing sectors. The problem of stagnant employment is shared in other Asian countries. Labor demand growth decomposition for China, Hong Kong, Indonesia, Japan, South Korea, the Philippines, Singapore, Thailand, and Vietnam for 1986-2008 shows that biased technological progress was responsible for more than 70% of slow employment growth, while structural transformation can only explain up to 30% of the gap between GDP and employment growth. Capital accumulation has been the dominant factor driving Asian economic growth at the early stages of the development, but as development proceeds, technological progress, especially the labor saving type, eventually plays a more important role.

Degree

Ph.D.

Advisors

Abbott, Purdue University.

Subject Area

Economics|Labor economics

COinS