World Bank Expert: "Increasing minimum wage has a negative impact on the economy"

In this workshop organized by the Vietnam Institute for Economic and Policy Research (VEPR) in collaboration with the JICA Office Japan, Futoshi Yamauchi, World Bank Specialist, said that increasing wages causes businesses to slow down.

According to his speech, increasing minimum wages would lead to an increase in average wages, which would reduce employment and reduce profits.

The 1% increase in minimum wages could increase the average wages by 0.32% and decline the number of workers by 0.13%. In addition, when the minimum wage increases by 100%, the rate of return (measured by return on sales) would fall by 2.3%.

In terms of employment, the impact of the increasing minimum wage has reduced employment in the public sector. For example, a 1% increase in minimum wage leads to a 0.25% reduction in employment. 

However, it should be noted that in the private sector, firms with higher levels of labor compliance (as reflected by social insurance contributions) are more likely to cut jobs.

In terms of profit, the private sector would suffer significant negative impacts from the increasing minimum wage. Specifically, when the minimum wage increases 100%, the rate of return is likely to decrease by 3.25%. This shows that the policy of rapid and continuous minimum wage adjustment slows this sector.

On machinery investment, as the minimum wage increases, labor-intensive industries such as textiles, wood products and furniture tend to replace workers by machines.

This means the fact that enterprises only continue to expand their production and invest in machinery (to replace labor) in the Vietnamese industries that have comparative advantages. For some other important industries, the business may not want to expand because of worries that labor costs would continue to increase in the future and they would lose comparative advantage.

Nguyen Duc Thanh, the Director of VEPR, spoke at the workshop that businesses tend to cut back on labor or raise wages when minimum wage is increasing.

He emphasized that the adjustment of the minimum wage must be consistent with productivity growth. Increasing minimum wages is likely to have negative impacts on employment and, more importantly, decline the competitiveness of Vietnamese firms.

In addition, the minimum wage does not play an effective role if it is formulated as a social protection policy because the current minimum wage system does not include non-contracted workers. Therefore, it does not have many effects on disadvantaged and vulnerable groups in society.

Firms that strictly comply with regulations on wages and labor benefits find it more difficult and they are forced to cut the number of workers. Thus, the Government's policy on increasing salary has a negative meaning. It not only protects the workers but also accidentally pushes millions of workers to the risk of losing their jobs.