Quality of domestic labour must increase for high-tech era

The World Bank in December released a report highlighting Vietnam as facing serious shortages of high-skilled labour which will need to be addressed quickly, or the economy will continue finding it difficult to climb the global value chains, especially when it comes to processing and manufacturing.

Quality of domestic labour must increase for high-tech era, Source: freepik.com

According to the World Bank, Vietnam’s global integration into global value chains capitalised on its comparative advantage and endowment of “abundant but relatively low-skilled” labour. “Vietnam attracted significant foreign investment in labour-intensive production and led to a high concentration in low value-added final assembly, which is reflected in its current labour demand,” the bank said.

Under the World Bank’s calculations, although the manufacturing sector has generated nearly five million jobs in the past 15 years, close to 85 per cent of all manufacturing jobs are low-skilled, while high-skilled positions such as electrical engineers, specialised technicians, programmers, or managers remain scarce, with less than half the proportion seen in Thailand (12.8 per cent).

Vietnam is now home to more than 38 million labourers who have no primary training, according to the Ministry of Labour, Invalids, and Social Affairs.

Meanwhile, many major multinational corporations are eyeing Vietnam as a good investment destination. Many have been shifting their manufacturing supply chains to Vietnam such as Apple, Dell, Foxconn, Pegatron, Nike, and Adidas.

“However, one of the most important things is that we will have to meet demand in high-quality labourers,” said Minister of Planning and Investment Nguyen Chi Dung. “Now, cooperation between training and vocational establishments and businesses is unstable.”

According to the World Bank, the role of private sector-led productivity growth will be especially important as the country’s historic sources of growth are gradually losing steam: capital accumulation is constrained by relatively low public investment due to a conservative fiscal policy and implementation challenges, while the contribution of labour supply is also declining due to fast ageing.

“This leaves productivity growth, in addition to further private sector capital accumulation, as the key growth engine going forward,” the bank stated.

Vietnam’s labour productivity (LP), which measures the value of output created per hour of work, is estimated to have increased 3.77-4.76 per cent in 2023, well below the National Assembly’s (NA) goal of 5-6 per cent. In 2024, it is estimated that LP will increase 5.56 per cent, higher than the NA’s target of 4.8-5.3 per cent.

At the end of November, the NA was heated up by discussions about the quality of domestic labour, with LP reported to remain low.

NA deputy Nguyen Van Manh representing the northern province of Vinh Phuc pointed out that despite some improvements, the quality of labour in Vietnam is still limited and “fails to meet the labour demand of a modern, flexible, sustainable, and integrative market”.

NA deputy Tran Anh Tuan representing Ho Chi Minh City said that for the country to reach its desired growth rates of 6.5-7 per cent, the average growth of LP must be 5.5 per cent.

“To this end, in addition to solutions to boost administrative reforms, it is necessary to unleash all social resources, remove difficulties for enterprises, investors, and people, and streamline the state apparatus,” Tuan suggested.

“At present, it is common to see that a set of dossiers must be appraised by many agencies, and each agency has many sections. Thus it is imperative now to restructure the apparatus in order to quickly solve administrative procedures for individuals and businesses, then helping to increase LP.”

NA deputy Duong Khac Mai representing the Central Highlands province of Dak Nong cited a government report compiled in October as saying that LP and labour quality in Vietnam have yet to become a driving force and breakthrough for boosting socioeconomic development.

“I think that this issue must be considered a vital issue for the economy because LP is the decisive factor that can determine the success of a nation,” Mai said. “If the country wants to thrive, it must increase LP. It is strongly suggested that the government pay more attention to further developing skills for labourers under proper scale, quantity, structure, and qualification, with high growth speed.”

Using an export-oriented processing and manufacturing development model, Vietnam is an open economy, with trade 1.7 times higher than GDP. In 2024, total export turnover is expected to reach about $807.7 billion this year – including over $400 billion for exports, while GDP is set to stand at $470 billion.

However, according to the World Bank, the advantages of the current export model based primarily on low labour costs, and labour-intensive exports will diminish as wages rise.

“Vietnam’s rising labour cost has not kept up with productivity, eroding its competitiveness,” the World Bank stated.

Under the bank’s calculations released in late November, labour cost in manufacturing – the average earning per hour worked – has nearly tripled in Vietnam between 2010-2022 to $4.90 per hour, and is now higher than in the Philippines and Indonesia, although it remains lower than in Malaysia, China or Thailand.

At the same time, LP has remained relatively low, in stark contrast to China and all its peers, including the Philippines and Indonesia. An average manufacturing worker in Vietnam creates $6.70 worth of value-added per hour worked, compared to $14.40 per hour in China, $19.70 per hour in the Philippines, and $27.70 per hour in Malaysia.

The World Bank suggested that to sustain wage growth while ensuring competitive unit labour costs, Vietnam will need to boost LP, including by transitioning into higher value activities.

The World Bank also said the limited supply of skilled workers presents a significant constraint to upgrading into more skill-intensive, higher value-added activities.

Specifically, a third of employers encounter a dearth of applicants for open positions, while 22 per cent of managers consider the greatest challenge to be finding a workforce with appropriate education. Today, nearly 80 per cent of manufacturing companies face difficulties in hiring skilled workers. Additionally, more than a third of employers perceive the limited capacity of their workforce as the principal impediment to technology adoption.

“As a result, more than 90 per cent of manufacturing jobs remain low-skilled. The example of the semiconductor industry – one of the key strategic opportunities for Vietnam - offers a cautionary tale about the limited availability of skilled workers, posing a risk to seizing opportunities from key industries and markets,” the World Bank said.