Structural Transformation, Biased Technical Change and Labor Demand in Viet Nam

Transcription

1 Structural Transformation, Biased Technical Change and Labor Demand in Viet Nam by Phil Abbott, Ce Wu and Finn Tarp Second 2013 Asian Development Review Conference Manilla, 1-2 August 2013

2 Background and general context UoC CIEM collaboration starting in 2000 SAM/CGE and associated work Household and enterprise studies Nature of domestic policy discussions in Viet Nam and international observers Present paper an example aiming to add to an ongoing debate in Viet Nam 2

3 A couple of literature references Krugman (1994), Young (1995), others Asian miracle due more to capital accumulation than to TFP growth Vietnamese case of low TFP growth is not unusual Rodrik (1997) TFP estimates low Estimates of technical change are biased, as labor saving technological change not captured Howard Pack & John Page and others

4 Point of Departure Stagnant Labor Demand? Vietnamese economy has been growing rapidly GDP growth from 1990 to %/year Labor demand has grown much more slowly GDP growth 8.4% 8.5% 7.3% Employment growth 2.0% 2.1% 2.2% Significant pessimism about employment generation 4

5 Economic Growth and Labor Trends 12 GDP growth 10 Employment growth Labor force growth 8 6 in Agriculture In Industry and services

6 Elasticity of Employment wrt GDP Elasticity = Employment growth/gdp growth Measuring stagnant labor demand From 2000 to 2008 this Elasticity = 0.28 in Vietnam MOLISA and ILSSA state this elasticity was in other Asian economies at comparable stage of development (Bangladesh, Pakistan, Indonesia, Rep. South Korea)

7 Labor Market Issues a view from ILO and MOLISA (2010) Restructuring the economy is going too slowly Urban rural, ag manufacturing, public private Growth reflects capital accumulation Little technical innovation taking place (discounted) Development has been excessively capital intensive (inefficient) Minimum wage foster capital intensive growth SOEs and foreign invested firms more capital intensive And incremental capital output ratios are high Rising population poses difficulties for the future Unskilled labor supply may race ahead of demand Shortages of highly skilled labor may have constrained growth in the past, or may constrain growth in the future 7

8 Structural transformation underway 70 Sectoral Employment Shares (%) Agriculture Industry Services 0 Year In 2008, agriculture < 20% of GDP but 50% of employment 8

9 Huge productivity differences across sectors Agriculture Value added per worker Industry Services Year 9

10 But is Vietnam so different from some other East Asian countries (WDI data)? World Bank (in 1999) and MOLISA (in 2009) may have had it wrong when they suggested labor demand kept up elsewhere in Asia Employment Elasticities comparable elsewhere! Big numbers for Thailand, Philippines & Indonesia: declines during recession Asian crisis! China Korea, Rep Thailand Indonesia Philippines Viet Nam

11 And productivity growth in all sectors: Erratic but seems similar (WDI data) Overall productivity growth explained in part by sectoral shifts Over 2% productivity growth in modern sectors, but also in agriculture Productivity growth Agriculture Industry Services

12 Three hypotheses: to explain slow labor demand (i.e. difference between GDP and labor demand growth) Structural transformation i.e. moving labor out of agriculture and into industry and services Shifting from low productivity traditional sectors (agriculture) to high productivity modern sectors Technological progress TFP or labor saving Excessive capital intensive development (institutional biases)? Minimum wage distorts wage rental ratio? State and foreign investment overly capital intensive? 12

13 Research Agenda Labor demand growth decomposition and structural transformation How far does structural transformation get us? Technical change: estimating biased TFP/Production functions TFP growth evidence has been mixed, inconclusive Labor efficiency enhancing biased technical change? Need production functions to assess TFP versus institutional issues Price incentives and capital intensity institutional bias information Strong institutional and market wage growth But do minimum wages or inflation drive market wage growth? And do wages affect input use? Institutional (state) investment allocation 13

14 Labor Demand Growth Decomposition 14

15 Labor Demand (eq 1) = labor demand =labor requirement per unit output in sector I (i.e. labor efficiency) =sector i s share of output =overall economic output (e.g. GDP or gross output) 15

16 Decomposition (eq. 4) Technical change and institutional wage bias + Structural transformation and investment bias Economic growth gl = labor demand growth ga Li = change in sectoral labor requirement (technological change, wage biases) gs i = sectoral share growth rates (structural transformation, state investment policies) gy = GDP growth Weighted by:,.. Note: / (overall labor output ratio) 16

17 Labor demand growth decomposition by sector, Activity Labor growth rate (%) gl i Relative unit labor use a Li /a L GDP share S i Growth rate of unit labor use (%) ga Li Biased technical change and institutional wage bias (%) Growth rate of GDP shares gs i Structural transformation and state investment bias (%) Agriculture, forestry and fishing Energy and natural resources GDP growth rate (%) gy Manufacturing Construction Infrastructure services Professional services Education and health Public services Other services GDP

18 Labor Demand Growth Decomposition Structural transformation + state investment bias contribute 30% Agriculture and manufacturing most important Biased technical change + institutional wage bias contribute 70% Agriculture, manufacturing and institutional services are all lowering labor use per unit output at 3.9% or more per year Need further analysis to sort between institutional factors and either structural transformation or technical change 18

19 Technological Change 19

20 Estimating Technological Change (1) Hicks neutral => TFP growth an approximate measure of productivity improvement (equal productivity growth rates across inputs at fixed prices) Labor saving (biased technological improvement => unequal productivity growth rates) => need for input specific productivity growth rates Recall Rodrik: if you assume Hicks neutral technological change and only compute TFPG using a Cobb Douglass production function (with =1) you underestimate TFP [i.e. actual input shares are used to measure exponents of production function, based on perfect competition and CRS] 20

21 Estimating Technical Change (2) To address these problems we: Estimated productivity growth for 18 aggregated sectors and for overall economy Allowing for both Hicks neutral and factoraugmenting technological change using Cobb Douglas ( =1) cannot identify bias CES Leontief ( =0) 21

22 Cobb-Douglas Theory

23 Cobb-Douglas (CD) Most common in literature but: CD using accounting approach gives somewhat low TFP Average TFP growth around 4% Econometric estimation of CD problematic Estimated parameters factor shares Unreasonable sectoral TFP estimates Poorly predicts output 23

24 CES Method identified to address bias Different estimates from alternative methods Difficult to sort between substitution due to changes in wage rental ratio versus technical change For some sectors significantly > 0 But some factor efficiency estimates seem unreasonably large! 24

25 Leontief Most reasonable estimates of technical efficiency improvement! 2% for capital, 5.8% per year for labor overall Labor efficiency enhancing technical change sems evident in many sectors But CES > 0 for some sectors 25

26 Predicting Output and Labor Demand Root Mean Square (RMSE) computed for output based on production functions: Leontief dominates Leontief results the most economically plausible In sum: We suspect there may have been significant labor augmenting technical progress 26

27 Institutional biases => capital intensive development Minimum wage policy State Investment policy => Labor demand? 27

28 Minimum Wage Two key linkages to have impact Do minimum wages determine market wages? From market wages to actual factor usage Nominal minimum wages increased 300% from 2000 to 2008 Real minimum wage up 68%, CPI up 78% But real state wages only up 60% And real (imputed) market wages up 50% Inflation a more powerful determinant of nominal market wages 28

29 Estimation of 3 wage determination equations Activity Dependent variables: nominal wage real wage real state wage real min wage CPI real min wage real min wage Agriculture and forestry *** 0.376*** 0.472** (1.36) (11.99) (6.39) (3.79) Manufacturing 0.262* 0.814** 0.130** 0.392*** (2.68) (4.21) (4.88) (10.75) Construction ** *** ( 0.26) (3.78) (0.28) (6.86) Wholesale and retail trade *** ( 0.22) (2.16) (1.90) (10.53) Hotels, restaurant *** 0.585*** 0.616*** Transport, storage and communications (1.94) (9.01) (7.39) (6.49) 0.596** 1.106** 0.603*** 0.416*** (5.46) (5.14) (17.14) (5.63) GDP 0.320** 1.148*** 0.347*** 0.492*** (5.59) (10.16) (13.39) (9.86)

30 Quantative impact Estimates from regression of real minimum wage on real market wage rate=>changes in real market wage rate Use predicted wage with CES conditional labor demand function to estimate impact on the laboroutput coefficient 30

31 The (relatively smaller) impact of institutional wage bias on labor-output coefficient, Activity Percentage change in: Unit labor use due to institutional wage bias (%) Overall unit labor use (%) Agriculture, forestry and fishing Manufacturing Infrastructure services

32 State Investment Estimates show SOEs are indeed much more capital intensive than private firms (labor output coefficients are low) SOE factor use is also relatively constant while private factor use show technical change! Stagnant technology for SOE s [so we fix and compute state output in sector using Leontief and get private output as difference to total sectoral output] SOE shares falling in manufacturing and services due to private and foreign invested sector growth Most of decomposition term explained by structural transformation not by state investment bias due to small and declining SOE shares 32

33 Impact of state investment bias on labor demand from 2003 to 2008 Sector Growth rate of output shares gs i relative unit labor use a Li /a L GDP share S i Impact on labor demand (%) Manufacturing Overall State Non state Construction Overall State Non state Infrastructure services Overall State Non state

34 Lessons Structural transformation only a partial explanation of stagnant labor demand in Viet Nam Institutional biases do exist, but technical innovation is found arguments that Viet Nam not doing so well do not appear well founded: the idea that one needs to drastically change economic policy for this set of reasons not valid A new approach to estimating TFP, that can address labor biased technical change, is needed to identify properly technical change in Vietnam Likely to find labor bias elsewhere, so technical innovation is also behind the Asian miracle 34

35 Helsinki, Finland