World Bank: Are minimum wages too high?

The World Bank’s most recent update on Vietnam’s economic developments concluded that (1) a high minimum wage, if enforced, will reduce formal employment; (2) outside the government sector, Vietnam’s minimum wages have risen rapidly in recent years, outstripping productivity growth, ; and, (3) , Vietnam’s private sector minimum wage is high relative to other countries.

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13. It is likely that an extremely high minimum wage, if enforced, will reduce formal employment. Increases in the minimum wage can also increase wages higher up the wage scale—and possibly reduce employment—through the “lighthouse effect” if some workers are paid multiples of the minimum wage. Given that Vietnam has attracted foreign direct investment (FDI) in part because of its low wages, there is a risk that a very high minimum wages will discourage further FDI and jobs it creates. Rising minimum wage levels have contributed to decreasing the country’s cost advantage relative to countries like Bangladesh or Cambodia where wages are still low relative to Vietnam (McKinsey Global Institute, 2012).

Real Minimum Wages Have Increased Much Faster than Productivity14. Outside the government sector, Vietnam’s minimum wages have risen rapidly in recent years, outstripping productivity growth. Figure 13 presents the growth of Vietnam’s minimum wages (click on the image to zoom in). By way of comparison, the growth of real labor productivity in the state, non-state domestic and FDI sectors are also depicted. The minimum wage increased most dramatically in 2012, when minimum wages in the domestic and foreign sectors were aligned. In real terms, the minimum wage has more than doubled since 2006, while productivity growth has been far less. It has been the Government’s stated ambition to raise minimum wages to a level that allows households to reach the “minimum monthly living standard” by 2018.This would imply further large increases.

Are Minimum Wages Too High?15. By simple measures, the ratios of the minimum to mean and median wages, Vietnam’s private sector minimum wage is somewhat high relative to other countries. A key benchmark of minimum wages is the relationship to median wages, and for Vietnam the picture differs sharply between the government and private sectors. Figure 14 depicts the ratios of minimum to average and median wages in Vietnam and selected countries in the OECD and EAP (click on the image to zoom in). The private sector minimum wage and the government sector reference wage are shown separately. Vietnam’s reference wage is low by global and regional standards at around the 30% of the median wage, while the private sector minimum wage is high, with the average ratio of minimum to median wage around 58%.

Sources:

Taking Stock: An Update on Vietnam’s Recent Economic Developments; Section II – Special Focus on Labour Market: Building Modern Labour Market Regulations and Institutions in Vietnam, July 2015, World Bank Vietnam Representative Office, pp 35, 36, 37

Taking Stock: An Update on Vietnam’s Recent Economic Developments, July 20, 2015, World Bank Representative Office Press Release, with link to the full report

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