Globalization, Wages and Wage Premia in a transition economy New Evidence From Vietnam

1. Globalization, Wages and Wage Premia in a transition economyNew Evidence From Vietnam DiepPhan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison, USA

2. Transitions, globalization and wages • East & Central Europe after 1990 • Collapse of state sector; abolition of wage grid, deep recession • In recovery, private sector emp’t growth led by private SMEs • Large private sector wage premium & positive selection of workers into private sector jobs • Persistent wage gaps favoring skilled and non-state workers • Krueger & Pischke 1995, Adamchik & Bedi 2000; Munich et al 2005, … • China and Vietnam transition to “market-led socialism” • No recession during transition; rapid trade growth • State sectors retain dominant role in economy • Positive selection of workers into state industries • Emergence of clear state sector wage premium • No consistent rise in skill premium

3. Vietnam: real wage growth 1992-2008

4. The issues • What explains changes in wages and skill premia? • Product of a beneficial form of global integration? • Or a one-time transition from command to market economy? • Different causes  different implications for dev. & policy • Incentives to acquire education and skills are important to sustain long-run growth • Issue: contemporaneous internal & external liberalization • How to identify the causes of observed changes in labor market? • What about interactions between the two? • New evidence: VN transition data span both processes

5. Vietnam’s transition: background • 1990s and 2000s: wide-ranging economic reforms; huge expansion of trade and inward FDI • Rapid growth, impressive poverty reduction • Key role of labor market to spread benefits of growth • Esp. through low-end mfg jobs taken by rural-urban migrants • But unlike E. Europe, State has remained a key player • Initial reforms (1990s) addressed mainly trade, not internal markets; SOEs were the primary beneficiaries • Later reforms (2000s) began to remove bias against private firms • But key factor markets (financial capital, land) remain under State control and SOEs retain disproportionate influence over policy

6. Notable policy reforms

7. Skill premium trend: nonlinear, non-monotonic

8. State sector skill premium has risen

9. Questions • What explain non-linear trend in skill premium? • What impacts of domestic and external reforms on skill premium? • Apparent segmentation of skilled L mkt between state and non-state sectors • If distortions persist, what implications for long-term human capital accumulation?

10. Data • Vietnam Household Living Standard Surveys 1993-2008 • We use 1993, 1998, 2002, 2008 (but results robust to other years) • Sample: all individuals aged 15-60 with reported wages • Hourly wage = annual total wage / hours worked per year • Annual total wage includes main salary, bonuses, & other benefits • Wages deflated using CPI to 1998 by region (U/R) and month • Only primary job is counted • Years of schooling • Range: 0-22 years • Institution: state or non-state employer • Industry: traded or non-traded as based on trade data • Other variables: location, gender, ethnicity

11. First look: Mincer model • Returns to schooling: basic Mincer (1974) model log(wi)= β0 + βEEi+ βXXi+ βSSi+ βTTi+ ϵiwherewi = real wage, Ei = education, Xi = covariates (region, gender, experience, … ), Si = state dummy, Ti = traded/non-traded industry dummy • In this model, • ∂log(wi)/∂Ei education effect on wage • ∂log(wi)/∂Si average effect of state employment on wage • ∂log(wi)/∂Ti average effect of tradable sector emp’t on wage

12. Bold: p < 0.05. Robustness checks: Heckman, industry dummies

13. Bold: p < 0.05. Robustness checks: Heckman, industry dummies

14. Mincerian wage trends: summary • Persistent and significant differences by institution (S) and sector (T) • Parameter instability • Returns to education v. low in 1993; rose significantly during 1990s; continued to rise but at slower rate in 2000s • Average premium remains low by international standards (Psacharopoulos and Patrinos 2004) • State sector wage premium rose rapidly in 1990s and remained >10% in late 2000s • Traded industries premium was zero, became negative in 2000s • What explains trends, and why does segmentation seem to persist?

15. Theoretical sketch • What rationalizes segmentation in skilled labor market? • State firms access capital at below-mkt rate, in fixed qty • Capital-skills complementarity (Griliches 1969; Krusell et al. 2000) • Counterfactual eq’m: unified mkt for skills, common wage • Capital allocation quota limits State sector hiring and results in separate wage offers; wS > w* > wN • Sectoral skill premia are differentially affected by domestic and external reforms (e.g. output price changes) • Why don’t non-state firms adopt skill-intensive techniques?Crowding-out and capital-skills complementarity

16. wS w* w* wN Q 0S H* 0N The intersectoral market for skilled labor

17. Accounting for heterogeneous trends • Standard Mincer equation imposes uniformity on returns to education, but this seems to contradict the data • We want to permit returns to education to vary across all relevant covariates • In wage equations for each sub-period, interact years of education with state dummy, traded dummy, and other covariates = “stacked” regressions • This yields “generalized” estimates of skill premium & trends between time periods

18. Generalized Mincer model • Policy reforms that had differential effects on S and T probably affected returns to skills through these variables • Do returns to education vary differentially through time and across S and T? • For each pair of survey years t = 1,2, employment status Rr, r = (S*T, S*NT, NS*T, NS*NT), and covariate vector X: = Triple-diff-in-diff model with 2 policy “treatments”, S and T • Group-specific differences allow for differential effects of X on returns to education • Need to deal with potential endogeneity (selection) issues

19. Selection bias and treatment effects • Selection into wage labor • Use Heckman model • Identfication vector includes dependency ratio, HH head dummy, non-wage income • Results: reject null of no selectivity • Parameter estimates almost same as in OLS • Selection into State employment • Quota = binary treatment for S sector jobs • Use treatment model (Maddala 1983: 117) • Identification variable: HH member with State job (“network”) • OLS estimates are biased upward, but qualitative story is robust • Signif of “network” variable also yields a distributional implication

21. Summary: Returns to schooling by institution, industryand year Changes in returns to schooling within sub-periods Bold = significant at p<0.05. For full estimates see Tables C-1 to C-3.

24. 1990s: State-led globalization • State sector workers started out with lower wages but saw faster wage growth. • This wage growth was even higher if also in traded industries. • Traded industry firms during this decade were mostly state firms. • Most FDI also went through state firms, and thus into capital-intensive industries. • Limited role of the private sector • Institutional/policy uncertainty • Capital constraints • Limited demand for skills (complementarity)

25. 2000s: Limited convergence • State sector premium continued to rise, but slower • Esp. slower in State traded industries • Labor market reform no longer influential • Increased competition from private sector in tradable industries • Private sector development and further trade liberalization • Labor-intensive firms/industries in private sector expanded • Wage premium for workers in traded industries became less negative • But returns to skills in non-state traded sector remain very low

26. Findings and implications • In VN, higher skill premium appears not to reflect either big increase in efficiency (as in E. Europe) or trade-driven increase in skill-intensity of production (Feenstra/Hanson, Zhu/Trefler, Hausman et al. 2007) • Rather, state-led globalization has dominated growth of skill premium, while non-state sectors have specialized according to H-O, with Stolper-Samuelson consequences • Labor mkt impacts of globalization strongly conditioned by persistence of pre-reform policies and institutions • Crowding-out in K mkt has spilled over to other factor mkts; welfare implications are not clear

27. Human capital & the middle income trap • The fastest-growing employment sector (non-state traded) does not (yet) reward investment in skills • Incentives for human capital acquisition? • Other studies find convergence of average return to education on int’l norms (e.g. Doan & Gibson 2010) • What are expected returns, weighted by probability of employment in either sector? • Does low growth of returns to schooling increase imminence of a “middle-income trap” for Vietnam? • What part of overall premium and state sector differential is due to persistence of SOEs? What part is due to other factors, implying other policy solutions?

28. Inequality in the long run • Importance of HH members in state employment (“network”) as predictor of own S sector employment • Implications: • Probability of State employment is higher if a family member already has it • Returns to education are much higher for State employees • Quota rents support this (cf. Domar 1965) • In these HHs, children stay in school/college longer • So long as capital mkt distortion persists, an education/earnings divide opens up along State-non-State lines • Inequality inhibits efficiency-enhancing institutional and policy reforms