Long-run costs of piecemeal reform: Wage inequality and returns to education in Vietnam

- Economic reform in Vietnam is incomplete, which imposes high costs on the economy in the long-run.
- There were introduction of markets and liberalization of trade and FDI.
- But there continued interventions in capital and labor markets which favor state firms and workers.
- This caused widening gaps in wages and skill premia between state and non-state workers.
- Consequences are reduced incentives to invest in education and increased inequality.

In this paper, we examine changes in wage structure and wage premia during Vietnam's transition from command to market economy. Relative to other work in this literature, our paper is unique in that we identify the policies that lead to such changes. By examining skill premium trends along the two dimensions of particular importance to the transition-state or non-state firms, and traded or non-traded industries-we are able to separate the contribution of external liberalization to wage growth and rising skill premia from that of domestic labor market reforms, and to examine potential interactions between the two types of reform. The results point to the high cost of incomplete reform in Vietnam. Capital market segmentation creates a two-track market for skills, in which state sector workers earn high salaries while non-state workers face lower demand and lower compensation. Growth is reduced directly by diminished allocative efficiency and reduced incentives to acquire education, and indirectly by higher wage inequality and rents for workers with access to state jobs.