Wage hike needs to keep up with inflation control

On October 20, Minister of Finance Ho Duc Phoc presented the Government's plan to allocate VND12.5 trillion (US$509 million) for wage reforms, including a 20.8% increase in the basic wage of civil servants from VND1.49 million (US$60) to VND1.8 million (US$73.3) from July 1, 2023.

If approved by the National Assembly, this is the second base salary hike since July 1, 2019, after a three-year delay due to the COVID-19 pandemic.

The base salary in Vietnam is the reference for calculating the total salary for civil servants by multiplying it with its corresponding coefficient.

The wage hike is considered an urgent issue as Vietnam is facing rising inflation pressure due to increases in fuel prices and other commodities as a result of the Russia-Ukraine war.

At the Q&A session of the 15th National Assembly meeting on November 5, Minister of Home Affairs Pham Thi Thanh Tra agreed it was reasonable to increase the basic wage as it would help create new motivation among civil servants and public employees and keep them in the state sector given the fact that nearly 40,000 civil servants left their jobs, primarily in education and healthcare sectors, during January 1, 2020 to June 30, 2022.

Many National Assembly (NA) deputies also called for a wage hike from January 1, 2023, six months ahead of the Government's proposed schedule, to compensate for the price surges which have increased 4% annually.

"This creates a shift of human resources from the public to the private sector," said Huynh Thanh Phuong, a delegate from Tay Ninh province.

Earlier on July 1 this year, the minimum wages of employees who work under labour contracts increased by 6%. The increase varies from US$140 to US$202 depending on the living expenses in their particular region.

Suitable time for wage hike

Not only in Vietnam, workers worldwide are asking for higher wages amid steep inflationary pressure. In some EU countries, there have been strikes and protests due to high energy prices and escalating costs of living.

But while inflation has indeed led to depressed real wages and a substantial squeeze on living standards, there have also been arguments that increases in wages could lead to further inflation – a so-called “wage-inflation spiral”.  

The idea suggests higher price inflation makes workers demand higher wages but higher costs will then lead firms to raise prices to protect their profit margins.

This psychology is true in Vietnam when information on wage hikes often goes along with the worry that prices will go up higher than salary and even before the wage hike takes effect.

Perhaps because of this phenomenon, the Government proposed to increase the base salary for civil servants and public employees from July 1 instead of January 1, 2023.

The Ministry of Finance said in the face of high inflation risk, the reform of salary policy should be carried out cautiously and in harmony with the objectives of socio-economic management in general.

January is close to the festive season with the New Year and Lunar New Year, so the demand for shopping and buying goods and services increases sharply. If the wage increase is implemented at this time, "it will put more pressure on price management because the psychology of increasing wages is accompanied by price surges, making it difficult to control inflation," the ministry said.

Thus, the Government proposed not to implement Resolution 27 of the National Assembly on the reform of salary policy for civil servants, public employees, the armed forces and workers of enterprises in 2023. Instead, the Government suggested increasing the base salary for civil servants and public employees by 20.8% to VND1.8 million per month from July 1, 2023.

The postponement of wage reform under Resolution 27 after 2023, according to the ministry, is also due to "the global and domestic context being under great inflationary pressure".

In the 2023 state budget estimate, the Government plans to spend about VND60 trillion for salary hikes. Funding is expected to be sourced from increasing budget revenue and annual expenditure saving.

However, according to analysts, the wage hike is only meaningful when the Government takes strong measures to control inflation to avoid a situation in which people receive one more VND but have to spend two because of inflation.

Vietnam among top countries with real wage hike

As Vietnam’s economy continues to grow despite the pandemic, rising wages will be an unavoidable feature of doing business in the country.

According to the annual Salary Trends Report by data company ECA International, Vietnam is forecast to see the second highest growth in real wage increase worldwide at 4% in 2023 in comparison with 2022, trailing behind India at 4.6%.

Asia Pacific is only the region predicted to see the average real salary increase — which is nominal wage growth minus the rate of inflation — by 1.3%. That’s compared to other regions which will see drops in average real salary of 1.5% for Europe, 0.5% for North and South America, and 0.1% for Africa and the Middle East. 

Eight out of the top 10 countries with the highest real salary increases globally are from Asia-Pacific this year, ECA international added. 

Within Southeast Asia, Vietnam, Malaysia and Thailand are expected to see higher rates of real salary growth in 2023 as the post-pandemic economic recovery continues accompanied by falling inflation. 

“Overall, workers in many ASEAN locations will see real salary growth in both 2022 and 2023,” said Lee Quane, ECA International’s regional director. “Workers based in Vietnam benefitted from having the second highest rate of real salary growth this year in the region and are expected to do so again in 2023.”

According to the Government's report at the 4th session of the 15th National Assembly, Vietnam’s GDP is expected to grow 8 % in 2022, surpassing the Government’s target of 6-6.5% for the whole year, and inflation is kept under 4%.