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Wednesday,  Sep 20,2017,14:39 (GMT+7)

Minimum wage rise does more harm than good for laborers

Thuy Dung
Thursday,  Sep 14,2017,19:35 (GMT+7)
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Minimum wage rise does more harm than good for laborers

Thuy Dung

Employees are at work at a garment factory in Vietnam. The minimum wage rise, a recent study shows, will force enterprises to reduce employment - PHOTO: TL

HANOI – Though the minimum wage rise is supposed to support workers, a recent study shows that it will bring about no positive impacts on laborers but force enterprises to bear higher costs and thus reduce employment.

The report, made by the Vietnam Institute for Economic and Policy Research (VEPR) and the Japan International Cooperation Agency (JICA), was launched in Hanoi on September 13.

Nguyen Duc Thanh, director of VERP, said the Government has hiked minimum wages repeatedly in recent years, with the pay raise at a double-digit rate between 2007 and 2015. The growth has surpassed that of gross domestic product per capita and the consumer price index.

The minimum wage rises have also been higher than those of labor productivity. In 2007, the minimum wage represented 25% of labor productivity but the figure soared to 50% in 2015.

Thanh said in 2017, the minimum cost that businesses in Vietnam have to pay, comprising minimum wage and insurance cost, is a little bit lower than in Thailand but higher than in Indonesia and the Philippines.

According to Thanh, the insurance cost which enterprises have to cover for laborers in Vietnam is much higher than in those countries.

Futoshi Yamauchi, senior economist at the World Bank, said the minimum wage rise will generally result in higher average wages, job cuts and profit declines.

On average, a 1% rise in minimum wage will lead to a 0.32% rise in average wage but a 0.13% decrease in jobs available. When the minimum wage increases 100%, the profit-to-sales ratio would fall 2.3 percentage points.

According to Yamauchi, businesses that strictly comply with wage and insurance policies would find it harder to ensure profit growth when the minimum wage rises, and as a result, they will lay off more workers. Meanwhile, businesses that evade the pay raise and insurance payments are hardly affected by the minimum wage rise.

Yamauchi said the minimum wage rise has the most negative effects on the private sector. When the minimum wage increases by 100%, the profit-to-sales ratio of private companies may dip by 3.25 percentage points, meaning that the continuous minimum wage hike will slow down the growth of the private sector.

To lessen effects of minimum wage hikes, some businesses will invest more in machinery and automation to replace human workers while some others will hesitate to expand production, worrying that wages would jump.

Nguyen Viet Cuong, wage specialist at the Mekong Development Research Institute, said the minimum wage increase has hardly had positive impacts on the economy. In fact, real salaries paid to workers at many companies have already been much higher than the minimum wage. Therefore, the minimum wage increase will only affect the enterprises’ contributions to the State’s insurance fund, with the current contribution rate standing at 32.5%.

Director of VERP Nguyen Duc Thanh said the minimum wage growth should not be faster than labor productivity growth. The Government should take measures to raise labor productivity and improve laborers’ working and living conditions, instead of relying too much on wage hikes.

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