There have been debates as to how Vietnam’s industry productivity can be increased.  A recent report by the Ministry of Planning and Investment shows that Vietnam’s labour productivity index reached VND 102.2 million (USD 4,400) per labourer in 2018, nearly double that of 2011. Despite this increase in labour productivity, some urges for the needs to catch up labour productivity of other ASEAN countries since Vietnam’s labour productivity is still very low in comparison with these countries.  For instance, Vietnam’s labour productivity is 7% of Singapore, 19% of Malaysia, 37% of Thailand, 45% of Indonesia, and 56% of the Philippines.  However, we need to understand that labour productivity is a single factor analysis of an economy and therefore might not show the true nature of an economy’s productivity.

Labour Productivity

Labour productivity, also known as workforce productivity, is the amount of goods and services that a group of workers produce in a given amount of time.  The OECD defines it as “the ratio of a volume measure of output to a volume measure of input”.[1]  Volume measures of output are normally gross domestic product (GDP).  The three most commonly used measures of input are as follows:

  1. hours worked, typically from the OECD Annual National Accounts database;
  2. workforce jobs; and
  3. number of people in employment.

It is apparent that industry productivity depends not only on the above three labour-related factors but also many other factors such as capital, economy scale, general knowledge and technologies.  Thus, it would not be a precise analysis of an economy’s productivity solely based on the labour productivity.

Multifactor Productivity

Multifactor productivity (MFP) reflects the overall efficiency with which labour and capital inputs are used together in the production process.  Changes in MFP reflect the effects of changes in many aspects of the economy, such as:

  • management practices;
  • brand names;
  • organizational change;
  • general knowledge;
  • network effects;
  • spillovers from production factors;
  • adjustment costs;
  • economies of scale; and
  • the effects of imperfect competition and measurement errors.

Growth in MFP is measured as a residual, i.e. that part of GDP growth that cannot be explained by changes in labour and capital inputs.  In simple terms therefore, if labour and capital inputs remained unchanged between two period, any changes in output would reflect changes in MFP.

An application of MFP to individual economy results in a dramatic difference in comparison with that of labour productivity.   The following table shows numbers and ranks of productivity among some OECD countries in 2017.

Average annual hours worked and GDP per hour worked of South Korea and Greece might suggest that a longer working hours results in inefficient work productivity.  However, this proposition might not be able to explain the case of Ireland, a country with the highest GDP per hour worked but 4th longest working hours.  On the other hand, MFP growth rates do not align with labour factors as it reflects multiple factors of an economy.  For instance, South Korea and Japan, the two countries well known for their long working hours, enjoyed very high MFP growth rates, especially South Korea enjoying the highest MFP growth rate.

Conclusion

In conclusion, more working hours or higher minimum wages do not necessarily guarantee better productivity. The things that Vietnam needs to improve are not only labour factors, but also other factors like capital contribution, education, technologies, science, knowledge, and big companies/brand names. It seems too early to “catch up” other ASEAN countries like Singapore or Malaysia before significant developments are made in many different fields in Vietnam.

[1] OECD Manual: Measuring Productivity; Measurement of Aggregate and Industry-Level Productivity Growth (2002).


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