Is Vietnam’s minimum wage structure sustainable?

Vietnam’s current minimum wage system came into existence just over a decade ago. A massive strikewave beginning at the end of 2005 began to protest the minimum wage in foreign-invested factories, which, despite inflation, had been frozen for 7 years.

In response, the minimum wage was raised by 40 percent and a tripartite minimum wage system – with voices from workers, employees, and the state - was set up. This is how it remains today.

Every year, representatives from the country’s trade union federation, the Vietnam General Confederation of Labor (VGCL), the Ministry of Labor, Invalids, and Social Affairs (MOLISA), and the Vietnam Chamber of Commerce and Industry (VCCI) come together to debate and decide the minimum wage levels for the following year.

There are four different minimum wage regions, which are supposed to reflect the cost of living in each area. Region I, including Hanoi and Ho Chi Minh City, has the highest minimum wage, while region IV, which is for rural areas, has the lowest.

The 2018 levels have recently been decided – they will be 6.5 percent higher than 2017. The rise brings the minimum wage for region I to VND3.98 million ($175) a month. Region II will be VND3.53 milion, Region III VND3.09 million, and region IV VND2.76 million.

The minimum wage structure is supposed to be a stable way to guarantee fair pay rises for workers each year. There are, however, major issues with the whole system.

The most obvious one is that the wage level is not enough to live on. A recent study by the Hanoi-based Research Center for Employment Relations, conducted for the Global Living Wage Coalition, estimated a living wage in Ho Chi Minh City to be VND6.44 million.

This is clearly a lot more than the 3.98 million minimum workers will be getting from the beginning of 2018. For rural Vietnam, the project calculated that a living wage is just under VND4 million, which again is a long way from the VND2.78 million workers in region IV will be guaranteed each month from 2018.

These living wage estimates were accurate as of March 2016, so would now likely be even higher. For people on such low wages, the gap between their guaranteed minimum and what they need to have a basic quality of life is life changing.

And the current minimum wage system may be structurally unable to give workers these higher wages. Joe Berry and Helena Worthen, lecturers at the Faculty of Labor Relations and Trade Unions at Ton Duc Thang University, have researched this issue.

They criticize an over-focus on official minimum wage fixing procedures. Formal and technical debates among powerful stakeholders about how much a minimum wage should be and what methodology should be used to calculate it can only go so far.

Drawing on global examples, such as America’s "Fight for $15" campaign, they argue that the current minimum wage fixing procedures in Vietnam are inadequate, and will never lead to the large pay rises needed to guarantee workers a living wage. Instead, a social movement and grassroots activism will be required to win such increases – such as the very activism which created the current minimum wage system to begin with.

Another problem with focusing so much on the minimum wage structure is that, in addition to needing a salary, workers also rely on other important benefits, such as employers’ social insurance contributions and the traditional 13th month Tet bonus – an extra month’s salary at the end of the lunar year, which many people need to use to buy tickets home and gifts for their family.

Many employers reduce these other benefits in order to bring down their labor costs in the face of a rising minimum wage (and a slowly rising one at that). The Tet bonus is increasingly being lost as employers are either not paying it, or “paying” workers leftover stock in lieu of any actual money. The social insurance fund is in major trouble, and may soon go into deficit. Many employers have not been paying into the fund, against regulations.

There are also unresolved legal issues surrounding the minimum wage. It is unclear, for example, whether and how many workers are protected by the minimum wage policy.

Part-time workers are a particular issue. “Article 34.3 of the Labor Code says that part-time employees have rights and obligations like full-time employees” – which includes being covered by the minimum wage system, points out Do Ha, a labor law expert and consultant based in Ho Chi Minh City.

“However, there is a practical problem. The minimum wage rates announced annually are for full-time employees. There is no clear provision or guidance saying how minimum wage rates should be calculated for part-time employees.” In practice then, employers could be applying – or not applying – minimum wage rates for part-time employees in any way they see fit.

Ha also adds that to be protected by the minimum wage policy, workers need a labour contract. And many do not have this. Lots of people work in an unclear grey area between being employees and being independent contractors. Gig economy workers, such as Grab and Uber drivers, for example, are not classified as workers, so have no guaranteed income. Furthermore, adds Ha, even if a worker is clearly in an employment relationship, “many employers now sign civil contracts with their workers” – which legally are not the same as labor contracts – “to avoid labor standards.” This also creates a legal uncertainty about whether such workers are covered by the minimum wage.

There is a final, more fundamental issue, regarding the very nature of Vietnam’s relationship to global supply chains. As Chang Hee-Lee, the Vietnam country director for the International Labor Orgzaniation, points out in a recent interview, companies that produce goods for export are often trapped between rising minimum wages and demand from global buyers.

The price global buyers are willing to pay for products, such as garments, has remained unchanged for years. This has been accompanied by demands from said buyers to improve efficiency, and, in some cases, improve factory health and safety through glossy Corporate Social Responsibility schemes – but without any willingness from multinational companies at the top of the supply chain to pay more for the products or commit money to the supplier factories to help them do this.

Many factories in Vietnam, then, find their profit margin being squeezed from the top buy global buyers, and from the bottom by minimum wage increases. As a consequence, they are against minimum wage increases, and may at times be unable to pay them.

Vietnam’s current minimum wage system was created to provide a stable and sustainable way to negotiate fair minimum wage increases each year. This structure is certainly better than none at all, and labor watchers and researchers keenly follow the negotiations each year.

But there are deep issues that cannot be ignored or papered over simply by focusing on minimum wage negotiations. If these are not addressed, then, at some point, something will have to give.

*Joe Buckley is a PhD candidate in International Development at SOAS, University of London. The views expressed here are his own.