Vietnam minimum wage reform: towards a law
Making a law on minimum wages (MW) is not a new topic. Since its inception, the International Labor Organization (ILO) has adopted a large number of legal instruments on minimum wages. So far, member states have adhered to these instruments to adopt domestic policies.

Truong Giang Nguyen[1]

Making a law on minimum wages (MW) is not a new topic. Since its inception, the International Labor Organization (ILO) has adopted a large number of legal instruments on minimum wages. So far, member states have adhered to these instruments to adopt domestic policies. In Vietnam, the Government recognizes the effects that minimum wages can exert on labor relations and thus uses them as tools to appease rank-and-file workers from calling industrial actions. So far, various wage proposals have been drafted in accordance with the Vietnamese Government’s program for reforming compensation, social insurance and related policies during the 2008 - 2012 period and, specifically, to harmonize the minimum wage requirements for domestic and foreign invested businesses. In furtherance to this reform program, minimum wages have been raised on an annual basis, taking into account changes in the Consumer Price Index (CPI) and the rate of growth of Gross Domestic Product, as well as the current labor market. At the same time, there have been numerous recommendations that Vietnam should adopt a law on MW. The idea is currently being debated and the prospect of a new law passing seems to draw near. This article will capture an overview of Vietnam’s MW and premises for the advent of an MW Law.

Vietnam’s minimum wage regime and paradoxes

Until 2010, there were three types of MWs in Vietnam, namely the common MW, the MW applicable to Vietnamese companies (domestic MW) and the MW applicable to foreign-invested companies (FDI MW). However, as of 2011, FDI MW and domestic MW have been leveled off into a common regional MW as part of a move to remove discriminatory compensation between private and FDI sectors[2]. The common MW is fixed at a single rate and used to calculate social, health and unemployment insurance contributions and benefits and other welfare allowances, including pensions. The regional MW provides for minimum monthly wages that enterprises must pay workers. These rates hinge on regional demarcations. Vietnam divides the country into four regions based on their level of development and cost of living to which a corresponding rate of domestic and FDI MWs will be fixed. At the time of this writing, the common MW is approximately US$39.67; the regional MW is between approximately US$67.30 to US$96.15, depending on regional demarcations. The adjustment of MW has been recently annualized, taking into account the economic growth rate, the CPI, the labor market demand and supply nexus.

The MW rates in Vietnam are low. Fundamentally, MW functions to protect the low wage workers from falling below the poverty line. However, with the current rates, MW fails to discharge their mandate. According to the poverty line applicable to the period of 2011-2015, a person living on or less than VND400,000 (approximately US$21) and VND500,000 (approximately US$26) in rural and urban areas respectively is considered poor[3] whereas the maximum MW rates for a worker in these two areas would approximate US$67 and US$90, respectively. Consider that a worker earning a MW may have to support a family of three, by any measurement (be it by food or calorie method), the worker’s basic needs are barely met. Historical accounts of MW show that the 1993 MW just met 40% and the 2006 MW met only 67% of basic needs[4]. In fact, the MW rate and the poverty line are very close. By an international poverty line of approximately US$1.25 per day per person, the 2011 common MW rate is just above this line.[5]

Albeit low, MW is generally viewed by policymakers and economists to carry gigantic missions: MW contributes to stabilizing macro-economic performance; promoting sound and harmonious labor relations; and acts as a reference wage for social benefit calculations. Constant fears are mongered among government officials that rising MW would raise inflation and unemployment. This hypothesis may sound economically rational. Increasing consumption and higher labor costs are perennial factors leading to increasing inflation and unemployment pressures. Therefore, it is a conventional wisdom that curbing MW at certain rates would lower inflationary pressures. Then comes labor unrests in industrial zones. Workers are dying for governmental decisions on raising MWs and are ready for walkouts and stoppages when employers are not adjusting their salaries on time.

The common MW is a reference wage and thus causes a pecuniary burden on state budgeting. It is used not only for calculating social benefits, but also the lowest wage rate in the public sector where the higher wage rates are calculated by multiplying the lowest rate with a coefficient. Therefore, if the common MW increases to satisfy low wage workers’ basic needs, a host of other parasitic benefits would surge. Hence, state budgets fail to meet subsequent rising pensions, social allowances and high wages.

Towards a law

Current state of play

In Vietnam, MW regulations exist in the Labor Code and other implementing documents. Article 56 of the Labor Code states that “The minimum wages are fixed on the basis of the cost of living afforded by an employee who is employed in the simplest job under normal working conditions, which is to compensate the simple labor service performed and to set a portion aside for reproducing extensive labor services and is used as a reference for calculating wages for other types of labor. Subject to consultation with the Vietnam General Confederation of Labor and the employers’ representatives, the Government shall determine and promulgate from time to time a common minimum wage, a minimum wage for each region and a minimum wage for each industry. When the consumption price index increases resulting in reduction of the employees’ wages in real terms, the Government shall adjust the minimum wages to ensure the real wages.”

The factual rates of MWs are fixed by decrees annually adopted by the Government to index the MWs to the changing CPI. The 2011 MWs are regulated by Decree No. 22/2011/ND-CP dated April 4, 2011, on the common minimum wage (Decree No. 22), Decree No. 70/2011/ND-CP dated August 2, 2011, regulating the regional minimum wage for employees working in companies, enterprises, cooperatives, cooperative groups, plantations, households, individuals, agencies and organizations hiring labor. These decrees will be replaced by new ones in a couple of months to index the MW to the upcoming year inflation.

International legal framework

MWs and regulating MWs have become a universal issue dating back to the early 20th century. Even from the early days, the founding members of the ILO considered one of the aspects that should be the subject of regulations on conditions of work was a wage that secured workers “a reasonable standard of life as this is understood in their time and country”, thus responding to the concerns expressed by those member states which had signed the Peace Treaty of Versailles and considered that there was an urgent need to improve conditions of work, inter alia, by “the provision of an adequate living wage”.[6] So far, the ILO has adopted a number of legal instruments concerning MWs, namely the Minimum Wage-Fixing Machinery Convention (C. 26), 1928; the Minimum Wage-Fixing Machinery Convention (Agriculture) (C. 99) and Recommendation (R. 89), 1951; and the Minimum Wage-Fixing Convention (C. 131) and Recommendation (R. 135), 1970.

However, none of these above Conventions gives an exact definition and term as to what a MW should be. Convention No. 26 uses the term “Minimum Rates of Wages” whereas Convention No. 131 refers to “Minimum Wages”. The formal definition of MW was not coined until a meeting of experts convened by the Governing Body. These experts stated that the MW “represents the lowest level of remuneration permitted, in law or fact, whatever the method of remuneration or the qualification of the workers; MW is the wage which in each country has the force of law and which is enforceable under the threat of penal or other appropriate sanctions. MW fixed by collective agreements made binding by public authorities is included in this definition.”[7]

In addition to the ILO as a formal forum to address the MW issue, others such as SA8000, Codes of Conduct enforced by buyers also pose the issue of MW compliance. For example, the SA8000 requires that “Wages paid for a standard work week must meet the legal and industry standards and be sufficient to meet the basic need of workers and their families; no disciplinary deductions.”

Proposing a Law

Vietnam is in the global economy and must, in one way or another, comply with these international standards. In fact, Vietnam has been a member state of the ILO since 1993 and so far ratified 17 ILO Conventions, but not including any of MW Conventions mentioned above. However, there has been serious compliance at the level of law and commitments of the Government with respect to these specialized standards.

Therefore, recently the codification of MW regulations into a single body of law has been discussed. The Social Affairs Committee of the National Assembly issued the Official Dispatch No. 610/UBXH12 dated May 15, 2008, supplementing the law-making agenda of the National Assembly, Legislature No. 12. The Central Communist Party adopted the Resolution No. 20-NQ/TW dated January 28, 2008. These two seminal documents reiterated that “To adopt a Law on Minimum Wage to complete the legal system in the market economy, to effectuate the Wage Reform Project, and to meet international integration requirements.”

As per our informal discussions with officials from the Ministry of Labor, War Invalids and Social Affairs- a government agency responsible for drafting the Minimum Wage Law (Law), the Law is proposed to meet the following requirements: (i) clarify the concept, meaning, scope and target of application of the MWs; (ii) MW-Fixing Mechanism; (iii) delink MW from the public sector wages and social benefit; (iv) merge domestic and FDI MWs by 2012 in order to enforce the non-discriminatory principle under the WTO and (v) types of MWs; the Law should hinge on the fundamental principle of MWs being used to protect low wage workers from impoverishment and exploitation. Policymakers further uphold the idea that MWs are not just “minimum” in themselves, but should be “living”. In practice, a number of enterprises take advantage of the low MWs to pay workers just above the MWs only to avoid violating the laws. And the MWs should be detached from the calibration of pensions, social and health insurance and other types of allowances to relieve the financial burden from the state budget.

In a nutshell

It may be too hyperbolic to say an MW Law is to perfect the legal system, but at least it aims at a realistic goal of securing better living conditions for low wage workers. This may be food for thought for the upcoming Legislature of the National Assembly when it embarks on creating such a law.-

[1] Giang Nguyen is a graduate from Cornell School of Industrial and Labor Relations and is at present working for Baker & McKenzie (Vietnam) Ltd.

[2] The Government issued Decree No. 70/2011/ND-CP dated August 22, 2011, regulating the regional minimum wage for employees working in companies, enterprises, cooperatives, cooperative groups, plantations, households, individuals, agencies and organizations employing labor.

[3] Directive No. 1752/CT-TTg of the Prime Minister dated September 21, 2010, directing a general census on poor households for making policies on social security in the period of 2011-2015.

[4] Computed by the Institute of Labor and Social Affairs under the Ministry of Labor, War Invalids and Social Affairs in the framework of the World bank-Funded Project on Enhancing Capacity in Wage and Social Insurance Analysis, 2010.

[5] 2011 General MW is $39.67 per month.

[6] ILO: Minimum wages: Wage-fixing machinery, application and supervision, Report III (Part 4B) (General Survey), International Labor Conference, 79th Session, Geneva, 1992.

[7] Id.

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