Diep Phan, Beloit College, USA
Ian Coxhead, University of Wisconsin-Madison, USA

1
• East & Central Europe after 1990
•
•
Collapse of state sector; abolition of wage grid, deep recession
In recovery, private sector emp’t growth led by private SMEs
• Large private sector wage premium & positive selection of workers into private sector jobs
•
• Persistent wage gaps favoring skilled and non-state workers
Krueger & Pischke 1995, Adamchik & Bedi 2000; Munich et al 2005, …
• China and Vietnam transition to “market-led socialism”
• No recession during transition; rapid trade growth
• State sectors retain dominant role in economy
• Positive selection of workers into state industries
• Emergence of clear state sector wage premium
• No consistent rise in skill premium

2
All
No school
Primary school
Middle school
1993-1998
12%
9%
7%
11%
17% High school
College & higher
State
Nonstate
33%
18%
9%
1998-2002
8%
0%
3%
10%
12%
9%
17%
4%
2002-2008
15%
15%
13%
8%
11%
17%
12%
14%
1993-2008
20%
12%
11%
15%
23%
42%
30%
14%

3
• What explains changes in wages and skill premia?
• Product of a beneficial form of global integration?
• Or a one-time transition from command to market economy?
• Different causes  different implications for dev. & policy
• Incentives to acquire education and skills are important to sustain longrun growth
• Issue: contemporaneous internal & external liberalization
• How to identify the causes of observed changes in labor market?
• What about interactions between the two?
• New evidence: VN transition data span both processes

4
• 1990s and 2000s: wide-ranging economic reforms; huge expansion of trade and inward FDI
• Rapid growth, impressive poverty reduction
• Key role of labor market to spread benefits of growth
• Esp. through low-end mfg jobs taken by rural-urban migrants
• But unlike E. Europe, State has remained a key player
• Initial reforms (1990s) addressed mainly trade, not internal markets; SOEs were the primary beneficiaries
• Later reforms (2000s) began to remove bias against private firms
• But key factor markets (financial capital, land) remain under State control and SOEs retain disproportionate influence over policy

5
Domestic market liberalization Trade and international integration
1986 Doi moi
– “renovation” of the command economy: introduction of markets
1988/89 Introduction of import tariffs, unified exch rate
1991 Law on Import & Export Duties
(preferential tariffs)
1990-1 Recognition of private enterprises
(constitutional amendment); Law on Private
Enterprises, Law on Companies
1992 Vietnam-EU trade agreement
1994 US diplomatic recognition
1994 Law on Promotion of Domestic
Investment
– rules on approval process
1994 Labor Code – relaxes wage grid
1995 Law on State Enterprises – regulation and reform
2000 Enterprise Law
– significant domestic market liberalization
2006 Unified Investment Law – further domestic liberalization and more relaxation of foreign investment controls
1995 join ASEAN, apply to WTO
1999 MFN trade agreement with Japan
2000 US bilateral trade agreement (“WTO lite” – implemented 2002) mid-2000s
– various bilateral/multilateral
PTAs/FTS; 29 new Trade Laws
2006 WTO accession agreed (accession
2007)

6
Vietnam: skill premium 1993-2008
(wage relative to workers with no schooling)
3,50
3,00
2,50
2,00
1,50
1,00
0,50
0,00
1993 1998 2002 primary school degree high school degree
2004 2006 middle school degree college degree and higher
2008

7
0,090
0,080
0,070
0,060
0,050
0,040
0,030
0,020
0,010
0,000
Returns to schooling years, state vs. non-state
0,076
0,078
0,023
0,018
0,052
0,037
0,038
0,041
1993 1998 state private
2002 2008

8
• What explain non-linear trend in skill premium?
• What impacts of domestic and external reforms on skill premium?
• Apparent segmentation of skilled L mkt between state and nonstate sectors
• If distortions persist, what implications for long-term human capital accumulation?

9
• Vietnam Household Living Standard Surveys 1993-2008
• We use 1993, 1998, 2002, 2008 (but results robust to other years)
• Sample: all individuals aged 15-60 with reported wages
• Hourly wage = annual total wage / hours worked per year
• Annual total wage includes main salary, bonuses, & other benefits
• Wages deflated using CPI to 1998 by region (U/R) and month
• Only primary job is counted
• Years of schooling
• Range: 0-22 years
• Institution : state or non-state employer
• Industry : traded or non-traded as based on trade data
• Other variables: location, gender, ethnicity

10
• Returns to schooling: basic Mincer (1974) model log( w i
) = β
0
+ β
E
E i
+ β
X
X i
+ β
S
S i
+ β
T
T i
+ ϵ i where w i
= real wage, E i
= education, X i
(region, gender, experience, … ), S i
= covariates
= state dummy, T i traded/non-traded industry dummy
=
• In this model,
•
•
• ∂log(w i
)/∂E i
∂log(w i
)/ ∂S i
∂log(w i
)/ ∂T i

 education effect on wage average effect of state employment on wage
 average effect of tradable sector emp’t on wage

11
Determinants of wage: years of education (OLS)
Dependent variable: log(hourly wage)
Years of education
Years of experience
Years of experience squared
Ethnic minority =1
Male =1
Traded industry =1
State sector =1
Constant
N
1993
0.019
0.017
0.000
-0.036
0.310
0.015
-0.164
-0.003
2608
1998
0.041
0.023
0.000
-0.004
0.183
-0.025
-0.134
0.428
3590
2002
0.047
0.022
0.000
-0.130
0.185
-0.110
0.216
0.584
21451
2008
0.058
0.037
-0.001
-0.084
0.202
-0.051
0.116
1.218
7019
Adjusted R-squared 0.10
0.17
0.31
0.32
Bold : p < 0.05. Robustness checks: Heckman, industry dummies

12
Determinants of wage: schooling achievement (OLS)
Dependent variable: log(hourly wage) 1993
Middle school degree 0.004
High school degree
College degree and above
0.066
0.272
Years of experience
Years of experience squared
Ethnic minority =1
Male =1
0.017
0.000
-0.083
0.313
Traded industry =1
State sector =1
Constant
N
0.017
-0.143
0.122
2608
1998
0.074
0.216
0.575
0.021
0.000
-0.060
0.190
-0.014
-0.124
0.673
3590
2002
0.127
0.287
0.635
0.023
-0.001
-0.190
0.197
-0.109
0.201
0.833
21451
2008
0.101
0.304
0.792
0.034
-0.001
-0.131
0.222
-0.043
0.109
1.549
7010
Adjusted R-squared 0.10
0.18
0.31
0.34
Bold : p < 0.05. Robustness checks: Heckman, industry dummies

13
• Persistent and significant differences by institution (S) and sector (T)
• Parameter instability
• Returns to education v. low in 1993; rose significantly during 1990s; continued to rise but at slower rate in 2000s
•
Average premium remains low by international standards (Psacharopoulos and Patrinos 2004)
• State sector wage premium rose rapidly in 1990s and remained
>10% in late 2000s
• Traded industries premium was zero, became negative in 2000s
• What explains trends, and why does segmentation seem to persist?

14
• What rationalizes segmentation in skilled labor market?
• State firms access capital at below-mkt rate, in fixed qty
• Capital-skills complementarity (Griliches 1969; Krusell et al. 2000)
• Counterfactual eq’m: unified mkt for skills, common wage
• Capital allocation quota limits State sector hiring and results in separate wage offers; w S > w * > w N
• Sectoral skill premia are differentially affected by domestic and external reforms (e.g. output price changes)
• Why don’t non-state firms adopt skill-intensive techniques?Crowding-out and capital-skills complementarity

H
S
(p
S
,K
S
,r
S
,w
S
)
H
N
(p
N
,r
N
,w
N
) w S w *
0
S
Q H *
The intersectoral market for skilled labor w * w N
0
N

16
• Standard Mincer equation imposes uniformity on returns to education, but this seems to contradict the data
• We want to permit returns to education to vary across all relevant covariates
• In wage equations for each sub-period, interact years of education with state dummy, traded dummy, and other covariates = “stacked” regressions
• This yields “generalized” estimates of skill premium & trends between time periods

17
• Policy reforms that had differential effects on S and T probably affected returns to skills through these variables
• Do returns to education vary differentially through time and across S and T?
• For each pair of survey years t = 1,2, employment status
R r
, r = ( S*T, S*NT, NS*T, NS*NT ), and covariate vector X:
log( w i
)
=
t
r a t r
( Year t
) * R r
* X i
+ e i
•
= Triple-diff-indiff model with 2 policy “treatments”, S and T a r
2 - a 1
Group-specific differences allow for differential effects of X on returns to education r
• Need to deal with potential endogeneity (selection) issues

18
• Selection into wage labor
• Use Heckman model
• Identfication vector includes dependency ratio, HH head dummy, non-wage income
• Results: reject null of no selectivity
• Parameter estimates almost same as in OLS
• Selection into State employment
• Quota = binary treatment for S sector jobs
•
•
Use treatment model (Maddala 1983: 117)
Identification variable: HH member with State job (“network”)
•
•
OLS estimates are biased upward, but qualitative story is robust
Signif of “network” variable also yields a distributional implication

OLS regression with full interaction, 1993 and 1998
State*trade*1998
State*trade*1993
Nonstate*trade*1998
Nonstate*trade*1993
State*nontrade*1998
State*nontrade*1993
Nonstate*nontrade*1998
Nonstate*nontrade*1993
State*trade*1998*educ_yrs
State*trade*1993*educ_yrs
Nonstate*trade*1998*educ_yrs
Nonstate*trade*1993*educ_yrs
State*nontrade*1998*educ_yrs
State*nontrade*1993*educ_yrs
Nonstate*nontrade*1998*educ_yrs
Nonstate*nontrade*1993*educ_yrs
N
0.013
-0.008
0.073
0.044
0.038
0.002
6198
Adjusted R2 0.6
Constant suppressed; other covariate extimates not shown
Coeff.
0.357
0.284
0.435
0.096
-0.066
-0.191
0.233
-0.129
0.021
-0.029
SE
0.084
0.141
0.041
0.054
0.138
0.157
0.117
0.15
0.009
0.014
0.005
0.006
0.007
0.009
0.008
0.01
t
4.26
2.01
10.61
1.79
-0.48
-1.22
1.99
-0.86
2.23
-2.16
2.39
-1.33
10.85
5.07
4.89
0.19
19 p
0
0.044
0
0.073
0.63
0.224
0.047
0.389
0.026
0.03
0.017
0.185
0
0
0
0.852

20
Summary: Returns to schooling by institution, industry and year
State*Traded
Non-state*Traded
1993
-0.029
-0.008
1998
0.021
0.013
State*Non-traded 0.044
0.073
Non-state*Non-traded 0.002
0.038
2002 2008
0.051
0.047
0.005
0.019
0.082
0.091
0.035
0.040
Changes in returns to schooling within sub-periods
State*Traded
Non-state*Traded
State*Non-traded
1993-98
0.050
0.029
0.020
1998-02
0.036
-0.004
0.015
2002-08
-0.004
0.013
0.009
Non-state*Non-traded 0.036
0.002
0.006
Bold = significant at p<0.05. For full estimates see Tables C-1 to C-3.

21
Estimated average returns to schooling by industry, state and non-state workers (% per year of education)
0,040
0,020
0,000
-0,020
-0,040
0,100
0,080
0,060
State*Traded Non-state*Traded State*Non-traded Non-state*Non-traded
1993
1998
2002
2008

0,050
0,040
0,030
0,020
0,010
0,000
-0,010
22
Estimated returns to schooling by industry, state and non-state workers:
Annual average growth rate (%)
1993-1998
1998-2002
2002-2008

23
• State sector workers started out with lower wages but saw faster wage growth.
• This wage growth was even higher if also in traded industries.
• Traded industry firms during this decade were mostly state firms.
• Most FDI also went through state firms, and thus into capital-intensive industries.
• Limited role of the private sector
• Institutional/policy uncertainty
• Capital constraints
• Limited demand for skills (complementarity)

24
• State sector premium continued to rise, but slower
• Esp. slower in State traded industries
• Labor market reform no longer influential
• Increased competition from private sector in tradable industries
• Private sector development and further trade liberalization
• Labor-intensive firms/industries in private sector expanded
• Wage premium for workers in traded industries became less negative
• But returns to skills in non-state traded sector remain very low

25
• In VN, higher skill premium appears not to reflect either big increase in efficiency (as in E. Europe) or trade-driven increase in skill-intensity of production
(Feenstra/Hanson,
Zhu/Trefler, Hausman et al. 2007)
• Rather, state-led globalization has dominated growth of skill premium, while non-state sectors have specialized according to H-O, with Stolper-Samuelson consequences
• Labor mkt impacts of globalization strongly conditioned by persistence of pre-reform policies and institutions
• Crowding-out in K mkt has spilled over to other factor mkts; welfare implications are not clear

26
• The fastest-growing employment sector (non-state traded) does not (yet) reward investment in skills
• Incentives for human capital acquisition?
• Other studies find convergence of average return to education on int’l norms (e.g. Doan & Gibson 2010)
• What are expected returns, weighted by probability of employment in either sector?
• Does low growth of returns to schooling increase imminence of a
“middle-income trap” for Vietnam?
• What part of overall premium and state sector differential is due to persistence of SOEs? What part is due to other factors, implying other policy solutions?

27
• Importance of HH members in state employment
(“network”) as predictor of own S sector employment
• Implications:
• Probability of State employment is higher if a family member already has it
• Returns to education are much higher for State employees
• Quota rents support this (cf. Domar 1965)
• In these HHs, children stay in school/college longer
• So long as capital mkt distortion persists, an education/earnings divide opens up along State-non-State lines
• Inequality inhibits efficiency-enhancing institutional and policy reforms