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Sliding salary scales

Employers should not be allowed to construe the minimum wage as a "˜maximum wage', says the International Labor Office

Workers buy vegetables outside the Linh Trung Export Processing Zone in Ho Chi Minh City. Urban laborers are finding it difficult to make ends meet with low salaries and rising prices. (Photo by Nghia Pham)

Workers need to be able to bargain for better wages if Vietnam wants its economy to be truly sustainable, Rie Vejs Kjeldgaard, director of the United Nations International Labor Office Vietnam, tells Thanh Nien Weekly.

Thanh Nien Weekly: The low labor cost is considered one of Vietnam's competitive advantages against other countries. What are your opinions about this?

Rie Vejs Kjeldgaard: Clearly low labor cost is one of the key competitive advantages for a developing country. It is a source of attraction for those global companies that primarily have business strategies based on lowest possible production costs and mass production of standardized products.

Low labor costs if used wisely can be effective for a country to begin its process of industrialization. Vietnam has very successfully used the lower labor costs to attract considerable foreign direct investment and obtain strong trade relations.

What is important to keep in mind is that as global experiences and trends also clearly show an economic development model that builds too strongly on low labor costs cannot be sustained in terms of business competitiveness nor bring about sufficient benefits to the majority of workers.

As an economy generates economic growth, as so well done in Vietnam, the costs will increase and hence move the wage component of the total costs for a business upwards while other developing economies with even lower labor costs than Vietnam will also emerge.

What should Vietnam's future competitive advantages be?

The only way to ensure future competitiveness is to focus on labor productivity, and not simply labor costs. It will be the improvement of the labor productivity that must be the focus for building Vietnam's future competitive advantage.

Vietnam must, as it has also already identified, focus on improved human resource development and especially having a skilled and productive labor force relevant for the actual needs of national and international businesses operating in Vietnam.

How do you assess the current practices regarding minimum wage in Vietnam?

In some parts of the world, there is a tendency for some people to think that minimum wage in practice is not minimum wage, but more perceived as a "maximum" wage. In other words that paying the minimum wage is sufficient. This would be a generalization that could lead to severe misunderstandings. The key challenge in this entire debate is the lack of ability on the part of the key labor market actors workers and employers to determine the wage level through negotiation, including collective bargaining.

In many countries, trade unions have come to rely on yearly minimum wage settings to achieve wage increases for the workers, as they were not able to bargain effectively with employers. Employers have also found it easy and convenient to rely on minimum wage as the reference rate. Applying minimum wage gave them an appearance of complying with the law.

And, equally important, such a system limits the link between the wage determination and that of the market principles. The situation in Vietnam is similar.

In Vietnam, another factor has influenced the policy and practice of minimum wage. Minimum wage continues to play the role of the basic reference wage in a system of coefficients, especially in the state sector. Furthermore, it is used as the reference point for various social welfare benefit payments, including pension, and allowances for war veterans and invalids, which are funded from the government budget.

As a result, the government could not but consider its budgetary burdens in making decisions on minimum wage. This has been a key factor in keeping the minimum wage low and this has, in return, prompted the development of a complex system with different rates for the state sector, domestic private sector, and the foreign invested sector.

Do you think Vietnamese workers are paid what they are worth?

As you see, the traditional story of factories in industrial zones suffering a loss of workers after the Tet holidays has recently become a more serious phenomenon. Industrial zones have relied on workers from other provinces and have regarded these workers as temporary.

This can be seen by the fact that the living conditions for the workers, including housing, are extremely poor. Low wages and unacceptable living costs have persuaded workers to seek work nearer their home, or to find jobs that pay higher wages in the widely available industrial zones throughout the country. The low wages and sub-standard living conditions usually found in many industrial zones are unsustainable.

Reliance on low wages is an obstacle for Vietnam in moving up to the next stage of development, and it is unsustainable.

Low wages are a disincentive for businesses to invest in technology and innovation and a discouragement for workers to invest in skills development. At the same time, low wages results in low purchasing power, hindering the development of the domestic consumer market. A dynamic domestic consumer market is essential, even for export-oriented economies, especially when the global economy is faced with serious volatility.

What do you think about the government's decision to increase minimum salaries next month?

I believe this is a discussion that is primarily had with respect to the state sector. There was another increase a few months ago that applied to the non-state sectors. The current use of minimum wage as the reference point for actual wage and social benefits is causing serious strain on the government and the minimum wage system.

At the same time, it is a factor distorting wage setting in the market economy. The most important thing in ensuring that minimum wage functions as an important social policy instrument is promoting negotiations, especially collective bargaining for actual wage increases, as the key mechanism for setting the real wage.