Causes of labor retrenchment in vietnam evidence from firm based data

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUES VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAUSES OF LABOR RETRENCHMENT IN VIETNAM: EVIDENCE FROM FIRM-BASED DATA By NGUYEN THI THANH NHAN MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2012 A UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUES VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAUSES OF LABOR RETRENCHMENT IN VIETNAM: EVIDENCE FROM FIRM-BASED DATA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI THANH NHAN Academic surpervisor Dr PHAM KHANH NAM HO CHI MINH CITY, DECEMBER 2012 B ABSTRACT Labor retrenchment is one of the most important issues of enterprises during the reform process in a transition economy, especially in the market economy In the recent years, the number of labor fired in Vietnamese enterprise has risen rapidly The question of whether which factors impact on labor retrenchment in firms is still considered Therefore, this paper examines the causes of labor retrenchment in Vietnam I focus on micro, small and medium enterprises using firm-level in Small and Medium Vietnamese Enterprises Survey in 2009 Using descriptive statistic and regression model, the results are found that enterprise’s performance measured by output; training cost for labor, wage rate; factors such as debt, firm age, firm size and competition; impact on the degree of labor retrenchment Technological innovation measured by equipment investment affects labor retrenchment in a firm insignificantly KEYWORDS Labor retrenchment Micro, Small and Medium Enterprises Vietnam i TABLE OF CONTENTS Page ABSTRACT……………………………………………………………………… i TABLE OF CONTENTS…………………………………………………………ii LIST OF FIGURES, TABLES AND GRAPHES …………………………… vii INTRODUCTION………………………… ……………………………… 1.1 Problem statement…………………………………………………………… 1.2 Research objectives and research questions…………………………………3 1.3 Data resources and research methodology………………………………… 1.4 Structure……………………………………………………………………… LITERATURE REVIEW ………………………………………………… 2.1 Definition……………………………………………………………………… 2.2 Theories…………………………………………………………………………7 2.3 Empirical studies on determinants of labor retrenchment……………… 12 2.3.1 Empirical studides before 2000 year……….………………………13 2.3.2 Empirical studies after 2000 year………………………………… 15 2.4 Summary…… ……………………………………………………………… 18 RESEARCH METHODOLOGY………… …………………………………20 3.1 Data……………………………………………………………………………20 3.1.1 Data resources and sample size……………………………………20 3.1.2 Variables…………………………………………………………….21 ii 3.2 Research methodology……………………………………………………….21 3.2.1 Conceptual framework…………………………………………… 22 3.2.2 Model……………….……………………………………………… 27 3.2.3 Variable descriptions …………………………………………… 29 3.2.4 Summary ………………………………………………………… 36 ANALYSIS RESULTS……… ……………………………………………….44 4.1 Regression results…………………………………………………………… 44 4.1.1 Descriptive statistics……………………………………………… 44 4.1.2 Regression results……………………………………………………49 4.2 Summary …………………………………………………………………… 52 CONCLUSIONS……… …………………………………………………… 53 5.1 Conclusion…………………………………………………………………… 53 5.2 Recommendation…………………………………………………………… 55 5.3 Limitation…………………………………………………………………… 56 REFERENCES………………………… ……………………………………….viii APPENDIX….………………………………………………………………… xxi iii LIST OF FIGURES, TABLES AND GRAPHES FIGURE 2.1 Determinants of labor retrenchment in empirical studies…… 19 FIGURE 3.1 Conceptual framework ………………………………………… 23 TABLE 3.1 Sample distribution……………………………………………… 30 TABLE 4.1 Summary statistics………………………………………………… 44 TABLE 4.3 Regression results………………………………………………… 49 TABLE A1 Empirical studies summary…………………………………………xi TABLE A2 Criteria for small and medium enterprise according to the decree No 56/2009 NĐ-CP dated 30 June 2009 of the government……xvi TABLE A3 Variable discriptions……………………………………………… Table A4 Correlation matrix of dependent and independent variables in efficiency model GRAPH 4.1 LARERA (used in Tobit model)………………………………… 46 GRAPH 4.2 LARERA (used in Logit model)………………………………… 46 iv INTRODUCTION 1.1 Problem statement Vietnam is a transition economy, changing from a centrally plan economy to market economy, specifically, being introduced the so-called Doi Moi reforms to make its transition in 1986 In July 1995, Vietnam became the seventh member of Association of Southeast Asia Nations In the early 2000s, Vietnam integrated into the large world of economy rapidly Moreover, Vietnam has been a member of World Trade Organization in 2006, making more investment opportunities to develop economy In the overall view related to economy, through assessment of international organizations, Vietnam’s economy has significantly grown First, according to the evaluation report on the investment environment of the World Bank and International Financial Company, Vietnam’s economy ranked from 91st among 178 economies in 2007 to 93rd among 183 economies in 2009 (General Statistic Office, 2010) In terms of two indices of “loan” and “contract implementation,” they were improved remarkably More specifically, “loan” index ranked from 43 in 2008 to 30 in 2009, meaning that it improved 13 steps “Contract implementation” index ranking from 42 in 2008 to 32 in 2009, improving 10 steps (General Statistic Office, 2010) Furthermore, World Bank assessed that Vietnam had considerably improved both tax area and international trade area Moreover, Vietnam had many efforts in improving the business environment Therefore, Vietnam will create a more favourable business environment to develop enterprises and to attract foreign investment in the coming years Second, according to assessment of United Nations Conference on Trade and Development (UNCTD), Vietnam has improved many factors in the business environment, and Vietnam was one of the top fifteen countries attracting more foreign direct investment (FDI) in the world As an illustration, China, The United States, India, Brazil and Russia are five most attractive countries to FDI in the world in the period of 2009 to 2011 Meanwhile, Vietnam was one of fifteen countries in attracting FDI in that period, being one of the top six countries attracting investors from Japan and other developing countries in Asia Finally, although international organization assessed that Vietnam has implemented many policies to improve the business environment in the recent years However, there are many fields needed reform to enhance the national competitiveness capacity, and to impact positively on the business performance of all enterprises In the specific view related to enterprise’s development in Vietnam, the number of enterprises increased fast in 2009 According to survey of General Statistic Office in 2010, up to January 2009, non-state-owned enterprises increase rapidly in terms of quality, creating jobs for workers To illustrate that number of active non-stateowned enterprises was 196779 enterprises, accounting for 95.7% total enterprises, being equal 5.6 times as many as that in 2000 In terms of micro, small, and medium enterprises, the number of firm increase significantly Although there are many firms established in the recent years, there is the large labor retrenched Undeniably, in the transition economies and developing countries, the labor retrenchment in enterprises is one of the most important reform programs In the foreign countries, there are empirical studies related to determinants of labor retrenchment in state-owned enterprises They found that there is the relationship between firm size, productivity and hiring standards, meaning that firm behavior in which firms choose to hire standard to maximize profit’s impact on labor retrenchment in a firm (Weiss, 1984) Furthermore, the development of technology affected significantly on the labor retrenchment in firms A large number of enterprises faced labor surplus after applying modern technologies Therefore, retrenchment of labor is a very crucial problem of enterprises during the transition process to the market economies, especially in the market economy with competition among firms (Pinto et al, 1993) According to these reasons, this paper determines which factors impact on the labor retrenchment program in micro, small, and medium enterprises in terms of firm- level, using data set from Vietnamese Small and Medium Enterprises survey in 2009 1.2 Research objectives and research questions Research objectives The main objective is to investigate determinants of labor retrenchment in Vietnamese Micro, Small and Medium Enterprises1 using the firm-level data in 2009 Research questions This study seeks to address the following questions: Main question Which factors affect labor retrenchment in micro, small, and medium enterprises? Sub-questions Questions related to enterprising performances:  Is there the negative relationship between the degree of labor retrenchment and output?  Is there the negative relationship between the degree of labor retrenchment and training cost?  Is there the positive relationship between the degree of labor retrenchment and wage rate?  Is there the positive relationship between the degree of labor retrenchment and debt? Questions related to technological innovation: Criteria to for a micro, small, and large medium enterprise according to the decree No 56/2009/NĐ-CP dated 30 June 2009 of the Government is presented in Table in appendix  Is there the positive relationship between the degree of labor retrenchment and technology equipment investment? Questions related to other factors:  Is there the positive relationship between the degree of labor retrenchment and firm age?  Is there the positive relationship between the degree of labor retrenchment and firm size?  Is there the positive relationship between the degree of labor retrenchment and competition? LITERATURE REVIEW 2.1 Definition Definition needing to be focused is labor retrenchment According to empirical studies, labor retrenchment is defined as the labor reduction, and the ratio of a labor reduction is defined as number labor reduction in the current period divided by the total labor force of the preceding period (Hu & Wong, 2004) Another definition, labor retrenchment is defined as labor discharged and the rate of labor discharged, which is computed as the ratio of layoffs to the total employment (Dong, 2012) 2.2 Theories There are many theories related to labor market However, in this study just analyzes labor market theory to estimate reasons of labor retrenchment More specifically, based on labor market theory, it is straightforward to find determinants impacting on labor demand and labor retrenchment The small part in this section presents empirical studies related to determinants of labor demand Human capital Human capital is designated as the flow of productive services provided by a worker (Fine, 1998) It is accumulated through education, training, work experience Further studies on the current topic are therefore recommended that data used in the study, which should be panel-data The sample size should be larger Moreover, some independent variables may be added into the model such as politicaleconomic factors9, industry-specific macro shocks.10 This variable is suitable to estimate the causes of labor retrenchment in state-owned enterprises (SOEs) To approximate the government’s financial leverage, we focus on the ratio of the balance of the government’s budget to gross domestic product (GDP) It is assumed that governments under a budget deficit are more likely to refrain from providing employment directly through SOEs than are governments with a balanced budget or a surplus (Hu et al, 2004) 10 We divide enterprises into four industry groups: basic manufacturing, mining, chemical and petrochemical manufacturing and utilities (Dong, 2012) 35 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Million SME - VND) WARA Wage rate Wage rate (Percent) SME + DEBT Debt Dummy variable SME + 33 1= firm has debt 0= firm has no debt Technological innovation TEIV Technology and equipment investment Dummy variable 1= firm has invested SME + to SME + in technology and equipment 0= firm has not invested in techonology and equipment Other factors FIAG Firm age From established year present (Year) FISI Firm size11 Number of employee (Workers) SME + COPE Competition Dummy variable + SME = facing competition = no facing competition Ɛ Error term (Source: Author) 11 Firm size is considered number of employees in enterprise 34 Table A3: Correlation matrix of dependent and independent variables in efficiency model LARERA_LOGIT LARERA_TOBIT OUPU TEIV DEBT TRACO WARA FIAG FISI COPE LARERA_LOGIT 1.0000 0.7313 0.1905 0.1397 0.1486 -0.0012 0.2028 -0.1598 0.1935 0.1044 LARERA_TOBIT 0.7313 1.0000 0.0773 0.0808 0.1029 -0.0142 0.1446 -0.1180 0.0700 0.0326 OUPU 0.1905 0.0773 1.0000 0.0960 0.0811 0.0566 0.3352 -0.0950 0.2709 0.0353 TEIV 0.1397 0.0808 0.0960 1.0000 0.0251 0.0133 0.1942 -0.0457 0.1667 0.0145 DEBT 0.1486 0.1029 0.0811 0.0251 1.0000 0.0339 0.0694 -0.0685 0.0646 0.0476 TRACO -0.0012 -0.0142 0.0566 0.0133 0.0339 1.0000 0.1510 -0.0175 0.0763 0.0185 WARA 0.2028 0.1446 0.3352 0.1942 0.0694 0.1510 1.0000 -0.1327 0.1865 0.0760 FIAG -0.1598 -0.1180 -0.0950 -0.0457 -0.0685 -0.0175 -0.1327 1.0000 -0.0664 -0.0218 FISI 0.1935 0.0700 0.2709 0.1667 0.0646 0.0763 0.1865 -0.0664 1.0000 0.0260 COPE 0.1044 0.0326 0.0353 0.0145 0.0476 0.0185 0.0760 -0.0218 0.0260 1.0000 (Source: Author) 35 Logistic regression Log likelihood = -796.37594 LARERALOGIT Coef Number of obs = 1465 LR chi2 (8) = 247.28 Prob> chi2 = 0.0000 Pseudo R2 = 0.1344 Std.Err Z P>ǀzǀ [95% conf Interval] OUPU -0.0003918 0.0005046 -0.78 0.437 -0.0013807 0.0005971 TEIV 0.1818114 0.1281823 1.42 0.156 -0.0694213 0.433044 DEBT 0.6477124 0.1581365 4.10 0.000 0.3377707 0.9576542 -0.1666674 0.0628829 -2.65 0.008 -0.2899155 -0.0434192 0.0130397 0.0043449 3.00 0.003 0.0045239 0.0215556 FIAG -0.0280947 0.0066574 -4.22 0.000 -0.0411429 -0.0150464 FISI 0.0225955 0.0028361 7.97 0.000 0.0170368 0.0281542 COPE 0.9259897 0.2915485 3.18 0.001 0.354565 1.497414 _cons -2.580144 0.3407085 -7.57 0.000 -3.24792 -1.912367 TRACO WAGERA viii Marginal effect after Logit y= Pr (LARERA – LOGIT) (predict) = 0.31613846 Std err P>ǀzǀ Variable dy/dx Z OUPU -0.0000847 0.00011 -0.78 0.438 -0.000299 -0.000129 46.6555 TEIV* 0.0390192 0.02727 1.43 0.152 -0.014425 0.092463 0.60273 DEBT* 0.1303839 0.02904 4.49 0.000 0.073474 0.187294 0.759044 TRACO -0.0360326 0.01363 -2.64 0.008 -0.062744 -0.009321 0.073107 WAGERA 0.0028191 0.00094 3.01 0.003 0.000986 0.004652 18.7286 FIAG -0.0060739 0.00142 -4.27 0.000 -0.008865 -0.003283 14.0997 FISI 0.004885 0.00064 7.58 0.000 0.003622 0.006148 23.7679 COPE 0.167579 0.04169 4.02 0.000 0.085861 0.249297 0.920819 *dy/dx is for discrete change of dummy variable from to ix [95% C.I] X Tobit regression Number of obs = 1465 LR chi2 (8) = 126.46 Prob> chi2 = 0.0000 Pseudo R2 = 0.0784 Log likelihood = -747.84906 LARERATOBIT Coef OUPU P>ǀzǀ Std.err Z 0.000134 0.0000942 1.42 0.155 -0.0000509 0.0003189 TEIV 0.0530314 0.0300849 1.76 0.078 -0.005983 0.1120457 DEBT 0.1693022 0.0369269 4.58 0.000 0.0968667 0.2417378 -0.0222434 0.0157249 -1.41 0.157 -0.0530893 0.0086025 0.0043641 0.0008813 4.95 0.000 0.0026354 0.0060928 FIAG -0.0069988 0.0015164 -4.62 0.000 -0.0099734 -0.0040242 FISI 0.0004072 0.0001547 2.63 0.009 0.0001038 0.0007106 0.129952 0.0611482 2.13 0.034 0.0100041 0.2485702 TRACO WAGERA COPE [95% conf Interval] x _cons -0.5003004 0.0757153 0.440967 0.016534 /sigma Obs summary: -6.61 0.000 -0.648823 -0.3517778 0.408534 0.4730999 994 left-censored observations at LARERA_TOBITǀzǀ [95% C.I] X OUPU 0.000134 0.00009 1.42 0.155 -0.000051 0.000319 46.6555 TEIV* 0.054314 0.03008 1.76 0.078 -0.005934 0.111997 0.60273 DEBT* 0.1693022 0.3693 4.58 0.000 0.096927 0.241678 0.759044 TRACO -0.022243 0.01572 -1.41 0.157 -0.053064 0.008577 0.073107 WAGERA 0.0043641 0.00088 4.95 0.000 0.002637 0.006091 18.7286 FIAG -0.0069988 0.00152 -4.62 0.000 -0.009971 -0.004027 14.0997 FISI 0.0004072 0.00015 2.63 0.008 0.000104 0.00071 23.7679 COPE 0.129952 0.06115 2.13 0.034 0.010104 0.2498 0.920819 *dy/dx is for discrete change of dummy variable from to xii ... determinants of slope of labor demand include the diminishing marginal product of labor, changing in elasticity of product demand as output varies, and complementarities across firms and industries... to FDI in the world in the period of 2009 to 2011 Meanwhile, Vietnam was one of fifteen countries in attracting FDI in that period, being one of the top six countries attracting investors from. .. OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUES VIETNAM THE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAUSES OF LABOR RETRENCHMENT IN VIETNAM: