Regulating for Decent Work 2015
8-10 July, Geneva
The impact of minimum wage adjustments
on Vietnamese workers' hourly wages
By
Henrik Hansen, John Rand and Nina Torm
University of Copenhagen
Outline
1) Overview
2) The Vietnamese Context
3) Literature
4) Data
5) Method
6) Results
7) Conclusion
2
1) Overview
Research question: How do minimum wage changes affect
earnings inequality among Vietnamese wage workers?
Data: Labour Force Survey data: 2011-2013
Econometric approach: Standard treatment approach
Main results:
• Overall reduction in earnings inequality: a 10% point
increase in the effective minimum wage leads to a 2-5%
decrease in the ratio of the lowest wage percentiles to the
median
• The rate at which the gap closes decreases as we move
up the wage distribution and from the 40th percentile the
results are no longer statistically significant
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2) The Vietnamese Context
The minimum wage: “the lowest rate paid to the employee who performs
the simplest work in the normal working conditions and that must ensure
the minimal living needs of the employees and their families” (Labour code,
2012)
• Minimum wages vary across ownership form, time and location
• The grouping and the level depends on expected economic
development the following year => endogeneity
• Between 2011 and 2013:
• The real minimum wage rose by about 24% per annum
• The minimum/median wage ratio (the Kaitz index) increased
from 44% to 60%, indicating a substantial increase in the “bite”
of the minimum wage
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Figure 1: Minimum wages - domestic firms versus FIEs (2001-13)
1800
1600
1400
1200
1000
800
600
400
200
0
Domestic common (nominal)
FIE common (nominal)
Domestic common (real)
FIE common (real)
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3) Literature
• Recent meta-analyses/reviews include Belman and Wolfson (2014) on
the US and Leonard et al. (2013) for the UK
 Minimum wages serve to increase the earnings of those at the
bottom of the income distribution => reducing wage inequality
• Developing country reviews e.g. Betcherman (2014)
 Mix of modest negative, insignificant or small positive impacts on
aggregate employment, and positive findings for the distribution of
earnings and reduction of poverty
• On Vietnam, recent work includes Nguyen (2010; 2014) and Hansen
et al. (2014) using firm data (VES)
Existing studies highlight the importance of:
• Accounting for the endogeneity of minimum wages
• Correctly defining treatment and control groups
• Considering the dynamic effects
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4) Data
• Vietnamese Labour Force Survey (LFS) data collected by the
Vietnam General Statistics Office (GSO), 2011-2013
• Focus on wage-workers, since data on earned income is
reported only for this segment of the workforce
• Variation in terms of occupation, sector and demographic
characteristics help to explain changes in individual earnings
related to minimum wage changes
• 258,349 individuals observations over the three years
• We use individual wages to categorize workers into “low
wage”(230,837) and “high-wage” (27,512) groups
• But, first let’s consider whether the minimum wage is binding
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Figure 2: Wage distribution - all workers (2011-13)
• Average non-compliance rate is 8.5% (5% in 2011 and 12% in 2013)
• Compliance is lower in FIEs, the private sector and for informal workers
• Compliance is higher in State-owned enterprises (SOEs)
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5) Method (i)
• Main challenge: establishing a counterfactual
• Follow the approach by Lee (1999), Bosch and Manacorda (2010) and
Autor, Manning and Smith (2014)
• We specify a latent log-wage distribution which only differs in terms of
location and scale
• The effective minimum wage is the log of the minimum wage/median
wage in the relevant province, sector and year
• The difference between the observed and the latent log-wage quantiles is
the identified impact of the effective minimum wage
• We include the squared term of the effective minimum wage, to allow for
marginal effects that depend on the level of the minimum wage
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5) Method (ii)
• Identifying assumptions:
i. The latent log-wage distributions can be well approximated by a
function from the family of location-scale distributions
ii. The median log-wage in the observed distributions equals the
median in the latent log-wage distribution
• In order to have a province level panel, the individual level data is
transformed into a panel of 924 obs. over a 3-year period for each pth
quantile range
• As robustness, we also generate districts level panels including only
districts with > 100 individual worker observations per year and sector
within each district => sample of 882 quantile range observations
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6) Results: individual wage determinants
Log of real minimum wage
(1)
0.314**
(0.110)
(2)
0.253
(0.776)
Yes
No
No
0.224
258,349
Yes
Yes
No
0.251
258,349
Gender (male=1)
Age
Ethnicity (Kinh=1)
Unemployed
Seniority
Second job
Urban
Location, sector, time fixed effects
Location, sector, time interactions
Additional controls
R-squared
Observations
(3)
0.382**
(0.116)
0.145**
(0.007)
0.001**
(0.000)
0.032**
(0.009)
-0.014**
(0.009)
0.124**
(0.003)
-0.075**
(0.007)
0.017**
(0.012)
Yes
No
Yes
0.473
258,349
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6) Results: earnings inequality
• When fixed effects and individual wage determinants are
accounted for a 10% increase in the effective minimum wage
leads to a 5.1% increase in the lowest (10th) wage percentile
relative to the latent distribution
• Sector splits show that the results are driven by the formal
sector, in particular state enterprises and FIEs, whereas the
wage distributions for workers in private sector firms appear
to be unaffected by the minimum wage
• The absence of significant impacts in the upper part of the
distribution serves to validate our identifying assumptions.
• A lack of minimum wage spill-over (“lighthouse”) effects to
the informal sector which could result in decreasing wages in
this sector.
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7) Conclusion
• The relationship between minimum wage and individual wages is
positive and robust to different levels of aggregation
• Minimum wages reduced earnings inequality by moving the wages
at the lower end of the distribution closer to the median wage
• Applying the observed elasticities to the minimum wage increase
that occurred in Vietnam between 2011 and 2013 (24% average
yearly increase), implies a decrease in the differential between the
10th percentile relative to the median of up to 12%
• Wage distributions for workers in private sector firms appear to be
unaffected by minimum wage changes - is this indicative of
compliance issues among private domestic firms?
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Thank you!
Nina Torm
ninatorm@gmail.com