Labor costs in Vietnam higher than I expected

The World Bank had an interesting report out on SMEs in Vietnam. While it is interesting throughout, what caught my eye was that labor costs in Vietnam are actually higher than in its south east Asian neighbors:

PER CAPITA GDP IS JUST BELOW THE AVERAGE LABOR COSTS

The median Vietnamese firm reported that wages and salaries cost about $2,739 per worker—about twice as high as in Lao PDR, Myanmar and Malaysia, and about 30 to 45 percent higher than in Cambodia, Thailand, and the Philippines. Wage costs are, however, considerably lower than in the BRIC economies other than India.

The report says that the higher wages are actually tied to higher productivity in these other countries (based on unit labor costs, or the ratio of labor costs to value added) so that Vietnam remains competitive.

This raises a few thoughts:

First, I am surprised that Vietnamese labor costs are so much higher than its neighbors. We don’t see that in nominal GDP per capita. In fact, nominal GDP per capita (back in 2016) wasn’t that different than the labor cost mentioned in this report.

Second, there is a definite risk that Vietnam gets stuck in the middle in terms of labor costs. Meaning, their unskilled labor is too expensive, but they don’t have enough skilled labor to make up for it. The fact that total labor productivity is higher than neighboring countries means that “the median Vietnamese firm seems to be more productive than the median firms in any of the other comparator countries except for Laos.”

Third, no surprise but foreign firms are more productive. The rest of the report talks about how to link smaller Vietnamese firms to these more productive foreign firms in order to up the skills of the local companies. The report specifically talks about suppliers to the multinationals. This might be an interesting sector to get involved in. Basically, see what sector is bringing in the most FDI and then invest in suppliers to that sector. Writing out, obviously it isn’t rocket science…but maybe no one is being systematic about it.

Finally, women, as usual, have more difficulties than men. “While as many as or more linked firms are headed by a female manager in Vietnam compared to nonlinked firms in China, Malaysia and Thailand, it appears that Vietnamese women manager face additional difficulties to establish linkages.” A survey of female managers said the problem isn’t really capital but other things.

As someone who worked for years in the Middle East, this doesn’t seem that bad. But also means that maybe the extremely low-hanging fruit that I saw in Saudi of getting women to get any type of job is not available. There, just increasing the productivity of women by a tiny bit meant so much to disposable income, GDP, innovation, and so many other things.

The whole report can be downloaded here.