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Vietnam minimum wage hikes seen sending production costs soaring

The forthcoming spikes in the region-based minimum wages are expected to improve workers' incomes but production costs in labor-intensive industries will certainly pick up.

The Ministry of Labor, Invalids and Social Affairs, which is drafting a decree on the region-based minimum wages, proposes a wage increase of 6.5%, or VND180,000-230,000 a month, which would go into force early next year.

This is also what the National Wage Council, and representatives of employers and employees have agreed upon after three rounds of negotiations.

The current inflation rate of 4-4.5% is taken into account to guarantee a real wage rise for workers and labor productivity growth of 2-2.5% in a bid to meet 92-96% of their minimum living needs, according to the ministry.

The ministry said job creation, unemployment, production and business conditions, manufacturing costs and others have been factored into the proposed wage hike.

Given the 6.5% rise, production costs might move up 0.55-0.6% but the increase could be 1.15-1.2% in labor-intensive industries like textile-garment and leather-footwear.

According to the ministry, a new regulation on an expansion of social insurance coverage is also taken into consideration. The regulation specifies those entering into labor contracts of one month or longer must contribute social insurance.

The basis for social insurance contribution will be broadened to include salaries, allowances and others from early next year onwards, making the labor cost burden heavier.

Therefore, the Government has reduced the rate of compulsory social insurance contribution by the employer to the fund for occupational accidents and diseases by half a percentage point since June.

In addition, the Government has proposed the National Assembly Standing Committee lower the rate of the unemployment insurance fund for employees by 0.5%.
Impacts on employees and employers

Truong Van Cam, general secretary of the Vietnam Textile and Apparel Association, said the 6.5% pay raise would make life more difficult for companies in the sector. They would be compelled to cut production costs, improve productivity, and invest in new technologies to use less labor.

He also said the National Assembly should weigh lowering the ratio of contribution to the unemployment insurance fund for both employers and employees by half a percentage point given its current surplus.

Chang-Hee Lee, director of the International Labour Organization in Vietnam, said effects of the higher minimum wages could be felt differently by different groups of employers and workers. In particular, businesses at the lower end of the global supply chain may feel their price competitiveness squeezed, as the high wage increases have not abated in recent years.

Lee said the prices the Vietnamese firms relying on garment outsourcing contracts with multinationals have remained largely unchanged for almost a decade, and in some cases, have even been lowered.

This is why employers in export-reliant industries have come under constant pressure to improve business efficiency and reduce production costs to stay competitive.

He underlined the need for multinationals to engage dialogues with Vietnamese suppliers and trade unions to ensure a fair share of economic gains and social responsibilities.

On the other hand, according to Lee, the new minimum wages can boost domestic demands.

It means higher minimum wages would improve incomes of the majority of workers that can boost domestic consumption and contribute to higher gross domestic product growth.


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