Do minimum wages affect firms’ labor and capital? Evidence from Vietnam

ABSTRACT

This study measures the effect of minimum wage increases on firm outcomes using fixed effects regression and panel data from Vietnam Enterprise Censuses during 2008–2010. It finds that minimum wages reduce firms’ labor size, albeit at a small magnitude. A one-percent increase in real minimum wages leads to a 0.1% reduction in the number of workers of firms. Firms are more likely to reduce male workers and those without social insurance. As a result, the proportion of female workers and workers with social insurance in firms increases due to minimum wages. Interestingly, under pressure of minimum wages, firms tend to increase assets, especially fixed assets, for labor substitution.

KEYWORDS:

• Minimum wages
• firms
• impact evaluation
• panel data
• Vietnam

JEL Classification:

• J31
• L25
• P42

Acknowledgments

I would like to express my thanks to Mrs Tong Thi Minh (Ministry of Labor, Invalid and Social Affairs of Vietnam), Mr Yoon Youngmo, Mr Sangheon Lee (International Labor Organization) and two anonymous reviewers from Journal of the Asia Pacific Economy for their very useful comments on this paper.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. For review of the effect of minimum wages in developing countries, see Cunningham (2007), Eyraud and Saget (2005), Kristensen and Cunningham (2006), Maloney and Mendez (2003), World Bank (2006), Neumark and Wascher (2007), and Lemos (2008).

2. For detailed definition of minimum wage regions, see Government of Vietnam (2009).

3. There is no data on wages for each worker in the data set. The average wage per worker is calculated by the total payment of firms for workers divided by the number of workers.

4. There are four regions of minimum wages, but there are eight geographical regions in Vietnam. In regressions, we control for the CPI of eight regions.

5. For double log functions, the effect of minimum wages is measured by coefficient of , and the estimated coefficient is interpreted as the elasticity of dependent variables with respect to minimum wage. When dependent variables are in a linear form (not in the logarithm form): as the minimum wage level changes by 1%, the value of the dependent variables changes by the coefficient of divided by 100 (see Wooldridge 2010).

6. In the data sets, there are no data on wages on workers by skills or education.

7. Fixed assets are non-current and physical assets such as plant and equipment.

8. The full regressions are not reported in this paper, but they can be provided for readers on request.

Additional information

Notes on contributors

Cuong Viet Nguyen

Cuong Viet Nguyen is a researcher in the Institute of Public Policy and Management, National Economics University, and also Mekong Development Research Institute, Hanoi, Vietnam. His main interests are development and behavior economics. His recent studies are published in referred journals such as American Political Science Review, Social Science and Medicine, World Bank Economic Review, World Development, Journal of Comparative Economics, and Health Economics.