Vietnam will increase its minimum wage for garment workers by 7.3% from 1 January 2017

Vietnam will increase its minimum wage for garment workers by 7.3% from 1 January 2017

Vietnam's National Salary Council may have agreed to increase the country-wide minimum wage next year by the smallest proportion in a decade, but the country's clothing manufacturers are still warning this will be a hike too far.

In August, Vietnam labour groups and businesses agreed on a 7.3% increase in the national minimum wage from 1 January 2017 – the smallest rise since a minimum wage system was first introduced in 1997.

Vietnam minimum wage to rise 7.3% in 2017

The Vietnam Textile & Apparel Association (VITAS), however, has opposed the increase. Speaking at her office in downtown Ho Chi Minh City, deputy secretary-general, Nguyen Thi Tuyet Mai, explains why: "The wage is too high. The minimum wage increases every year, so there are many difficulties for Vietnamese enterprises, especially garment companies because they use many employees."

Rather than the annual increases that have been made in recent years, VITAS has proposed only increasing the minimum wage every two to three years to give enterprises more time to adjust to changes.

The wage, however, is just one part of the cost that apparel companies take on when paying employees.

Government regulations insist that companies contribute to social and health insurance premiums for workers, and these are higher than in some other countries in Southeast Asia – especially low cost competitors for global clothing outsourcing work, Mai says. "The wage and social insurance makes up about 60% of the price of products [in Vietnam]," she tells just-style. "In Myanmar that only makes up 15-20% of the cost."

Chris Walker, a Ho Chi Minh City-based advisor with Vietnam Garment Insider, argues that this competition is creating serious problems for Vietnam's national apparel industry. "When labour costs go up, the price of the garment goes up. When we're competing with Bangladesh that pays, say, US$60 per month for a seamstress and we're having to pay $200. It will lead to a quicker death of the industry as a whole."

Dinh Quang Thuan, a partner at Ho Chi Minh City-based P&P Law Firm, agrees. He explains that only about 10% of employees in the Vietnam clothing and textile industry are paid the base minimum wage. Therefore, "when the new wage is applied, the wage of this group of employees will increase…and this may lead to wage increases of other groups in the same company," he explains.

"The result is that employers will have to pay more to their employees, and more to trade union funds and unemployment insurance funds since the employers' contribution to these funds is based on the minimum wage."

Wages in Vietnam are higher than Cambodia, Myanmar and Bangladesh, and new increases will likely put them above those in Indonesia too, claims VITAS's Mai. She says this has caused some garment buyers to take the logical economic step and move on from Vietnam to these cheaper countries.

Walker, for his part, highlights the tension between the desire of employees for higher wages and the problems this can cause for the industry. "Workers need a wage increase because the cost of living is increasing," he concedes, "but unless those workers have other jobs to go to, for example high-tech jobs, when the wages get too high the industry will have to shut down and they won't have jobs."

TPP uncertainty

Though Mai admits that relatively high wages have forced some companies to look elsewhere for their products, she believes the Trans-Pacific Partnership (TPP) trade deal could reverse that trend. If implemented, it would create huge benefits for Vietnam by lowering or eliminating tariffs on apparel to markets such as Japan and the US. However, TPP's fate is uncertain as both major US presidential candidates currently oppose it.

Walker, on the other hand, argues that the TPP will actually hurt Vietnam in the long term. "Wages only go up, unless there's a war or financial crisis, so a wage increase is expected," he says. "The irony is it makes us less competitive." He claims that wealth created by the TPP will just "accelerate the wage increases, which will eventually lead to a lack of competitiveness". 

He asserts that wages in Hanoi and Ho Chi Minh City, Vietnam's two main production bases, are already un-competitive internationally, and further wage increases will render even rural provinces uncompetitive.

Meanwhile, Dinh counters that there may be a silver lining to the higher wages in their potential ability to stop young Vietnamese workers from looking for jobs overseas.

"Many young people leave the country…because the wage and working conditions in Vietnam are not good enough," he says. "Therefore, although Vietnam is a young country with industries which use large numbers of employees such as garments and textiles, seafood and leather, they always encounter labour shortages. Hopefully, the high wage will gradually make the local market more attractive to young people and convince them to stay in Vietnam."