Implications of Vietnam’s minimum wage increase revealed Implications of Vietnam’s minimum wage increase revealed

Implications of Vietnam’s minimum wage increase revealed
04 Nov 2017

Vietnam’s National Wage Council has decided to introduce a modest 7.3% average increase in the monthly minimum wage for 2017. From January, workers must be compensated between a minimum of VND 2.60 million (US$116) to VND 3.75 million (US$166).

It is the lowest annual rise since 1997 and seems to amount to a compromise between an employer-proposed increase of 5% and that of workers, who pushed for 11%. But the decision also seems to be a response to competition from fellow manufacturing powerhouses in the region, making it primarily an effort to maintain the country’s attractiveness to foreign investors and businesses.

Vietnam’s National Wage Council

2016 is the fourth year since Vietnam shifted away from its previous model of setting minimum wages at the state level. Instead of the government mandating a given salary level - a policy last used in 2012 - it has now delegated this responsibility to the National Wage Council, which includes representatives from employers, trade unions and the government.

Acting as an advisory body to the government, the Council provides the private sector and labour unions with greater control over the wagesetting process. It also demonstrates Vietnam’s continued progress towards becoming a freer market. As such, when the minimum wage is being negotiated each year, factors such as the subsistence needs of workers, analysis of current economic and social developments and real wages are all taken into consideration.

This approach not only improves Vietnam’s business and investment climate, but also boosts its attractiveness to foreign investors. But how effective and fair it is in reality is debatable as the country still lacks formal minimum wage legislation to protect workers’ welfare.

Wage hikes in perspective

The wage increases of 7.3% planned for 2017 are significantly less than the last decade’s average annual rate of 15% as they partially reflect the lower inflation levels of 2% seen over the last year. But the increase still only covers an alleged 90% of minimum living costs in Vietnam, which has led to a public backlash and calls for more transparent wage legislation.

Despite its reception at home, the low increase puts the country in a competitive position in relation to its more developed peers in the ASEAN (Association of Southeast Asian Nations) bloc. Compared to Singapore’s monthly minimum wage of US$706.50 or Indonesia’s US$199.80, Vietnam’s rate remains lower.

But given the country’s heavy reliance on labourintensive industries such as garment production, a comparison with competitors that operate in these sectors might be more apt. For example, Cambodia, which is becoming an increasingly attractive hotspot for clothing businesses, set its 2016 monthly minimum wage at US$140.

This means that even though Vietnam is currently at the lower end of the region’s spectrum, the competitive edge currently provided by its low minimum wage may only be temporary.

Vietnamese competitiveness into the future

In the long-term, it is unlikely that Vietnam will be able to use wages alone as a means of achieving lasting competitiveness. But the recent signing of the European Union-Vietnam Free Trade Agreement (EVFTA) and the Trans-Pacific Partnership (TPP) deal with 11 other Pacific Rim countries presents Vietnam with favorable opportunities that should help complement its low minimum wage rates and accelerate growth in its manufacturing sector. In the short term, Vietnam’s EVFTA and TPP partners are likely to invest in the country based on its wage levels, thus cementing its position as a rising manufacturing hub and economic power.

But in the years ahead, low wage rates may become unsustainable due to the increasing role that labour unions are playing in pushing for minimum wage legislation and the mounting expectations of workers within the country. In addition, being a part of favourable free trade agreements compels the country to pay more attention to issues like workers’ welfare and working environments due to high levels of concern about such matters in the EU and US.

Vietnam’s increasing involvement in global trading arrangements necessitates a delicate balance between creating a favorable investment environment and ensuring the welfare of its people. So its modest minimum wage increase will offer Vietnam a significant advantage in the short-term in remaining attractive to foreign investors. But in order to take advantage of such opportunities, such investors will need to pay close attention to legislative changes, understand their implications and plan how they intend to deal with their possible effects carefully.

This article was first published on Asia Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about the firm can be found at: www.dezshira.com.

Vietnam’s National Wage Council has decided to introduce a modest 7.3% average increase in the monthly minimum wage for 2017. From January, workers must be compensated between a minimum of VND 2.60 million (US$116) to VND 3.75 million (US$166).

It is the lowest annual rise since 1997 and seems to amount to a compromise between an employer-proposed increase of 5% and that of workers, who pushed for 11%. But the decision also seems to be a response to competition from fellow manufacturing powerhouses in the region, making it primarily an effort to maintain the country’s attractiveness to foreign investors and businesses.

Vietnam’s National Wage Council

2016 is the fourth year since Vietnam shifted away from its previous model of setting minimum wages at the state level. Instead of the government mandating a given salary level - a policy last used in 2012 - it has now delegated this responsibility to the National Wage Council, which includes representatives from employers, trade unions and the government.

Acting as an advisory body to the government, the Council provides the private sector and labour unions with greater control over the wagesetting process. It also demonstrates Vietnam’s continued progress towards becoming a freer market. As such, when the minimum wage is being negotiated each year, factors such as the subsistence needs of workers, analysis of current economic and social developments and real wages are all taken into consideration.

This approach not only improves Vietnam’s business and investment climate, but also boosts its attractiveness to foreign investors. But how effective and fair it is in reality is debatable as the country still lacks formal minimum wage legislation to protect workers’ welfare.

Wage hikes in perspective

The wage increases of 7.3% planned for 2017 are significantly less than the last decade’s average annual rate of 15% as they partially reflect the lower inflation levels of 2% seen over the last year. But the increase still only covers an alleged 90% of minimum living costs in Vietnam, which has led to a public backlash and calls for more transparent wage legislation.

Despite its reception at home, the low increase puts the country in a competitive position in relation to its more developed peers in the ASEAN (Association of Southeast Asian Nations) bloc. Compared to Singapore’s monthly minimum wage of US$706.50 or Indonesia’s US$199.80, Vietnam’s rate remains lower.

But given the country’s heavy reliance on labourintensive industries such as garment production, a comparison with competitors that operate in these sectors might be more apt. For example, Cambodia, which is becoming an increasingly attractive hotspot for clothing businesses, set its 2016 monthly minimum wage at US$140.

This means that even though Vietnam is currently at the lower end of the region’s spectrum, the competitive edge currently provided by its low minimum wage may only be temporary.

Vietnamese competitiveness into the future

In the long-term, it is unlikely that Vietnam will be able to use wages alone as a means of achieving lasting competitiveness. But the recent signing of the European Union-Vietnam Free Trade Agreement (EVFTA) and the Trans-Pacific Partnership (TPP) deal with 11 other Pacific Rim countries presents Vietnam with favorable opportunities that should help complement its low minimum wage rates and accelerate growth in its manufacturing sector. In the short term, Vietnam’s EVFTA and TPP partners are likely to invest in the country based on its wage levels, thus cementing its position as a rising manufacturing hub and economic power.

But in the years ahead, low wage rates may become unsustainable due to the increasing role that labour unions are playing in pushing for minimum wage legislation and the mounting expectations of workers within the country. In addition, being a part of favourable free trade agreements compels the country to pay more attention to issues like workers’ welfare and working environments due to high levels of concern about such matters in the EU and US.

Vietnam’s increasing involvement in global trading arrangements necessitates a delicate balance between creating a favorable investment environment and ensuring the welfare of its people. So its modest minimum wage increase will offer Vietnam a significant advantage in the short-term in remaining attractive to foreign investors. But in order to take advantage of such opportunities, such investors will need to pay close attention to legislative changes, understand their implications and plan how they intend to deal with their possible effects carefully.

This article was first published on Asia Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about the firm can be found at: www.dezshira.com.

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