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GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison, USA

GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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Page 1: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMYNew Evidence From Vietnam

Diep Phan, Beloit College, USA

Ian Coxhead, University of Wisconsin-Madison, USA

Page 2: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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

Page 3: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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Vietnam: real wage growth 1992-2008

1993-1998 1998-2002 2002-2008 1993-2008

All 12% 8% 15% 20%

No school 9% 0% 15% 12%

Primary school 7% 3% 13% 11%

Middle school 11% 10% 8% 15%

High school 17% 12% 11% 23%

College & higher

33% 9% 17% 42%

State 18% 17% 12% 30%

Nonstate 9% 4% 14% 14%

Page 4: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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

Page 5: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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

Page 6: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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Notable policy reformsDomestic market liberalization Trade and international integration

1986 Doi moi – “renovation” of the command economy: introduction of markets

1988/89 Introduction of import tariffs, unified exch rate1991 Law on Import & Export Duties (preferential tariffs)

1990-1 Recognition of private enterprises (constitutional amendment); Law on Private Enterprises, Law on Companies

1992 Vietnam-EU trade agreement

1994 US diplomatic recognition

1994 Law on Promotion of Domestic Investment – rules on approval process

1995 join ASEAN, apply to WTO

1994 Labor Code – relaxes wage grid 1999 MFN trade agreement with Japan

1995 Law on State Enterprises – regulation and reform

2000 US bilateral trade agreement (“WTO lite” – implemented 2002)

2000 Enterprise Law – significant domestic market liberalization

mid-2000s – various bilateral/multilateral PTAs/FTS; 29 new Trade Laws

2006 Unified Investment Law – further domestic liberalization and more relaxation of foreign investment controls

2006 WTO accession agreed (accession 2007)

Page 7: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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1993 1998 2002 2004 2006 20080.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Vietnam: skill premium 1993-2008(wage relative to workers with no schooling)

primary school degree middle school degreehigh school degree college degree and higher

Skill premium trend: nonlinear, non-monotonic

Page 8: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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1993 1998 2002 20080.000

0.010

0.020

0.030

0.040

0.050

0.060

0.070

0.080

0.090

0.023

0.052

0.076 0.078

0.018

0.037 0.038 0.041

Returns to schooling years, state vs. non-state

state private

State sector skill premium has risen

Page 9: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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?

Page 10: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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

Page 11: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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First look: Mincer model• Returns to schooling: basic Mincer (1974) model

log(wi) = β0 + βEEi + βXXi + βSSi + βTTi + ϵi

where wi = 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

Page 12: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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Determinants of wage: years of education (OLS)

Dependent variable:log(hourly wage) 1993 1998 2002 2008

Years of education 0.019 0.041 0.047 0.058

Years of experience 0.017 0.023 0.022 0.037

Years of experience squared 0.000 0.000 0.000 -0.001

Ethnic minority =1 -0.036 -0.004 -0.130 -0.084

Male =1 0.310 0.183 0.185 0.202

Traded industry =1 0.015 -0.025 -0.110 -0.051

State sector =1 -0.164 -0.134 0.216 0.116

Constant -0.003 0.428 0.584 1.218

N 2608 3590 21451 7019

Adjusted R-squared 0.10 0.17 0.31 0.32

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

Page 13: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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Determinants of wage: schooling achievement (OLS)

Dependent variable: log(hourly wage) 1993 1998 2002 2008

Middle school degree 0.004 0.074 0.127 0.101

High school degree 0.066 0.216 0.287 0.304

College degree and above 0.272 0.575 0.635 0.792

Years of experience 0.017 0.021 0.023 0.034

Years of experience squared 0.000 0.000 -0.001 -0.001

Ethnic minority =1 -0.083 -0.060 -0.190 -0.131

Male =1 0.313 0.190 0.197 0.222

Traded industry =1 0.017 -0.014 -0.109 -0.043

State sector =1 -0.143 -0.124 0.201 0.109

Constant 0.122 0.673 0.833 1.549

N 2608 3590 21451 7010

Adjusted R-squared 0.10 0.18 0.31 0.34

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

Page 14: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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?

Page 15: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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

Page 16: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

0S H* 0N

wS

w*w*

wN

The intersectoral market for skilled labor

Q

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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

Page 18: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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

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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

Page 20: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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OLS regression with full interaction, 1993 and 1998

Coeff. SE t p

State*trade*1998 0.357 0.084 4.26 0

State*trade*1993 0.284 0.141 2.01 0.044

Nonstate*trade*1998 0.435 0.041 10.61 0

Nonstate*trade*1993 0.096 0.054 1.79 0.073

State*nontrade*1998 -0.066 0.138 -0.48 0.63

State*nontrade*1993 -0.191 0.157 -1.22 0.224

Nonstate*nontrade*1998 0.233 0.117 1.99 0.047

Nonstate*nontrade*1993 -0.129 0.15 -0.86 0.389

State*trade*1998*educ_yrs 0.021 0.009 2.23 0.026

State*trade*1993*educ_yrs -0.029 0.014 -2.16 0.03

Nonstate*trade*1998*educ_yrs 0.013 0.005 2.39 0.017

Nonstate*trade*1993*educ_yrs -0.008 0.006 -1.33 0.185

State*nontrade*1998*educ_yrs 0.073 0.007 10.85 0

State*nontrade*1993*educ_yrs 0.044 0.009 5.07 0

Nonstate*nontrade*1998*educ_yrs 0.038 0.008 4.89 0

Nonstate*nontrade*1993*educ_yrs 0.002 0.01 0.19 0.852

N 6198

Adjusted R2 0.6      

Constant suppressed; other covariate extimates not shown

Page 21: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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1993 1998 2002 2008

State*Traded -0.029 0.021 0.051 0.047

Non-state*Traded -0.008 0.013 0.005 0.019

State*Non-traded 0.044 0.073 0.082 0.091

Non-state*Non-traded 0.002 0.038 0.035 0.040

Summary: Returns to schooling by institution, industry and year

Bold = significant at p<0.05. For full estimates see Tables C-1 to C-3.

1993-98 1998-02 2002-08

State*Traded 0.050 0.036 -0.004

Non-state*Traded 0.029 -0.004 0.013

State*Non-traded 0.020 0.015 0.009

Non-state*Non-traded 0.036 0.002 0.006

Changes in returns to schooling within sub-periods

Page 22: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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State*Traded Non-state*Traded State*Non-traded Non-state*Non-traded-0.040

-0.020

0.000

0.020

0.040

0.060

0.080

0.100

Estimated average returns to schooling by industry, state and non-state workers (% per year of education)

1993199820022008

Page 23: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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State

*Tra

ded

Non-sta

te*T

raded

State

*Non-tr

aded

Non-sta

te*N

on-traded

-0.010

0.000

0.010

0.020

0.030

0.040

0.050

Estimated returns to schooling by industry, state and non-state workers:Annual average growth rate (%)

1993-19981998-20022002-2008

Page 24: GLOBALIZATION, WAGES AND WAGE PREMIA IN A TRANSITION ECONOMY New Evidence From Vietnam Diep Phan, Beloit College, USA Ian Coxhead, University of Wisconsin-Madison,

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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)

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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

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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

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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?

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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