Informal employment in the formal sector: wages and social security tax evasion in Vietnam

Using data from the 2006 Enterprise Census and Survey, the paper sheds light on why evasion and particularly under-reporting of wages is so common in Vietnam: only 46.4% of the enterprises are registered with social security, 21.7% of registered firms’ workers are not covered, and wages reported to social security represent only 32.5% of the wages actually paid. While there are institutional explanations for the situation, enterprises and workers’ motivations are not clear. Do employers withhold social security contributions for their own profit or do they pay them in higher wages to their workers? Using the variation in the share of social security contributions in wages across enterprises, the study first verifies that in Vietnam, as in many countries, enterprises can shift the burden of social security contributions on wages. In a second step, it searches for evidence that, within a same branch of industry, evading enterprises make higher profits or revenues per worker. While it is clear that enterprises that evade and under-report wages pay higher wages, there is no evidence of employers’ appropriation of the unpaid social security contributions. Taking five key policy implications, the conclusion explains that enforcement policies and information campaigns in Vietnam will marginally help expand social security and shrink informal employment and the business practice of under-reporting wages. Consensus-building activities conducive to regulatory changes and coordinated action among policymakers, enterprises and employees are required.