Exploring Viet Nam's export boom and its ripple effects on the labor market

In recent years, Viet Nam has emerged as a prime example of an export-led growth economy. This transformation has not only bolstered the nation’s economic standing but also had significant implications for its labor market. The intriguing question is, are these changes confined to exporting industries or do they disperse through the economy through supply chain linkages? A comprehensive study combining data from UN COMTRADE, the Global Trade Analysis Project (GTAP), and Viet Nam's annual Labor Force Surveys from 2010 to 2019 sheds light on this dynamic interplay.

Viet Nam’s case is particularly compelling for several reasons. Viet Nam's economic success over the past two decades is largely attributed to its strategic export-driven growth. This model has led to substantial real income increases, poverty reduction, and a significant integration into global value chains. Viet Nam also stands out for the prominence of domestic services in its economy, comprising about 10 percent of total output. These services are heavily utilized by non-service sectors, amplifying benefits of export growth. For example, approximately 50 percent of Viet Namese non-service sectors incorporate local services, which make up more than 15 percent of their final output.

Methodology: Analyzing Export Shocks

To understand the full effect of export shocks on the labor market, the study considers both direct and indirect exposure. Direct exposure pertains to increased exports in a worker’s own industry, while indirect exposure involves industries that use inputs from the worker’s industry. By constructing a detailed matrix of these exposures, the researchers were able to trace how changes in export demand ripple through various sectors and affect different labor market outcomes.

The authors employed three different empirical strategies to approach the research:

1. Instrumental Variable (IV) Methodology: This method isolates the exogenous component of trade driven by foreign demand, using the trading partner country's share in specific commodities adjusted by their GDP growth. This ensures that the analysis focuses on demand-driven changes rather than supply-side factors.
2. Shift-share instrument: By leveraging the “input-output” table, the study maps the flow of intermediate goods across sectors, thus distributes the export shocks into direct and indirect exposures at the province level proportional to the sectoral labor share of each province.
3. Regression Analysis: The final step involves regressing these exposure measures against various labor market outcomes, such as wages, employment rates, income disparities, and gender wage differentials. This comprehensive analysis helps identify the specific effects of export shocks on different demographic groups and sectors.

Key Findings: Wages, Employment, and Inequality

The study confirms quantifiable links between export growth and labor market improvements. Notably, wage enhancements are most pronounced among the lowest income earners, and employment opportunities expand across all income levels, albeit with reduced effects at higher income tiers.

The labor market evolution in Viet Nam extends beyond exporting industries. The benefits of export growth ripple through the economy, reaching sectors that supply inputs to exporters, including non-tradable sectors like services. This interconnectedness is pivotal for understanding trade's broader impact on the labor market.

The analysis reveals several noteworthy trends:

• Wage and Employment Gains: Export exposure significantly boosts wages and employment, especially for low-income and unskilled workers. Direct Exposure has the largest impact, raising annual wages by US$32.5 and income by US$36.31 per US$1,000 rise. Indirect Exposure also increases wages and income, albeit slightly less. Total Exposure lifts employment by 0.2%, with Indirect Exposure having a more significant effect, increasing employment by 0.52%.
• Reduction in Inactivity and Inequality: Export growth reduces economic inactivity and income inequality, with the highest employment gains seen in the lowest income quantile (1.77% per US$1,000 rise), diminishing in higher income brackets.
• Wage Premiums and Gender Wage Gap: College wage premiums decline with export growth, while the gender wage gap narrows, benefiting less educated and female workers and fostering a more inclusive labor market. Direct Exposure reduces the college wage premium by US$28 per US$1,000 rise, with Indirect Exposure slightly stronger at US$30.87.

Key conclusions include:

• Supply Chain Linkages Matter: Understanding the indirect effects of export shocks through supply chain linkages is crucial. These linkages can significantly amplify the impact of export growth on the labor market, affecting even non-exporting industries.
• Inclusive Growth Potential: Export-driven economic strategies can potentially reduce inequality and provide more opportunities for disadvantaged groups, such as less educated and female workers. Policymakers should consider these broader benefits when designing trade and economic policies.
• Targeted Interventions: To maximize the benefits of export growth, targeted interventions may be needed to support sectors and regions indirectly tied to exports. This could involve investments in skills training, infrastructure, and other measures to enhance the capacity of these areas to benefit from increased export activity.

Conclusions and Broader Implications for Policy and Research

Viet Nam's experience illustrates the profound impact of export-led growth on labor markets. The study's nuanced analysis of direct and indirect export effects sheds light on how global trade can shape wages, employment, and inequality.

The implications extend beyond Viet Nam, offering lessons for other developing economies engaged in export-led growth. Key takeaways include the importance of supply chain linkages, the potential for inclusive growth, and the need for targeted interventions to support indirectly connected sectors and regions. Policymakers should factor in these comprehensive benefits when crafting trade and economic policies, ensuring that the advantages of export growth are maximized for all segments of society.