Employment effects of trade reform in the Vietnamese banking industry

In response to the call for evidence of sectoral employment impacts of services trade reform, the paper examines how trade liberalisation in the Vietnam’s banking industry would change employment between sectors and total employment under in two macroeconomic settings: fixed versus variable labour supply. Using the FTAP-VN model and GTAP 7 Database, the paper finds that potential trade reform in Vietnam’s banking industry could have significant impacts on employment across industries in the economy regardless of the labour supply assumptions. Apart from the employment relocation effect as in the fixed labour supply, trade reform with a variable labour supply would expand jobs in all industries, increasing total employment by 6.3%. Trade reform would most benefit employment in the financial services itself and the industries with close linkages with the financial sector and facing the highest reduction in the relative price of labour to capital. In any cases, services would gain the most in terms of job creation from the trade reform. Services would also absorb most of the increased labour supply, followed by manufacturing and agriculture and mining. With a fixed labour supply, trade reform would encourage a substitution of unskilled labour for skilled labour across industries, placing skilled labour in a relatively disadvantaged position in the short run. In the short and median run, in order to avoid a shortage of skilled labour and consequent pressure on wages, Vietnam would need to invest in education and training to create a better skilled labour force, particularly in banking and finance. With a variable labour supply, in the long-run, the pressure on wage increase and substitution of skilled labour for unskilled labour could be mitigated with the transformation of unskilled labour into skilled labour and the increasing labour supply.