Structural Transformation, Biased Technological Change, and Labor Demand in Vietnam

Labor demand in Vietnam and elsewhere in Asia has grown more slowly than GDP over the last two decades. We use data for 18 aggregate sectors and the overall Vietnamese economy to examine the roles played by structural transformation, technical change and institutional bias toward capital intensive development to explain those. Decomposition of factors behind labor demand growth attributes only 30% of this difference to shifts from low productivity (agriculture) to higher productivity sectors, while the remaining 70% comes from declining labor use per unit output that is also found in agriculture. Estimation using a Leontief production function is consistent with significant labor augmenting technical progress and better explains Vietnamese outcomes. For the overall economy labor efficiency grows at 5.8 % per year, while capital efficiency grows at 2.0% per year. Rapidly rising minimum wages contribute to only a limited extent to declining labor use per unit output. Restructuring and rapid private sector growth in key sectors mean that capital intensive state investment plays a small role in explaining labor demand evolution. Hence, structural transformation only partially explains slow labor demand growth in Vietnam. While some of the difference from GDP growth may be attributed to capital intensive investment by the state, the majority of the difference is found to be due to technical change when low elasticities of substitution and labor augmenting bias in technical change are taken into account.This confirms suspicion that there may have been technical progress behind the Asian miracle.