Nguyen Van Cuong left his village in northern Vietnam four years ago to work in a Hanoi bicycle factory, keen to join the government-backed manufacturing boom that promised to transform the economy. Now, he’s had enough.
With only a high-school education, Cuong found the hours long and the work difficult. After the company cut his wages this year amid falling sales, he’s decided to go home and join the country’s growing ranks of casual labor instead.
“Working in a factory isn’t easy for someone not trained for it,” said Cuong, 25. “A part-time construction job is easier, and I don’t mind getting paid less as I’ll be home.”
Vietnam, heralded a decade ago as a mini-China in luring foreign manufacturers with cheap labor, is struggling to keep its economic momentum even as neighboring countries such as Malaysia and the Philippines record faster growth. The nation is showing signs of slipping into a low-productivity, low-value trap as workers leave formal jobs in industry and services, the United Nations Development Program said earlier this year.
Migrants like Cuong, who came to the cities with few skills in pursuit of higher factory salaries to support his family, are disappearing from official statistics as they switch to lower-value, lower-wage work. While Cuong has decided to head home, others remain in urban areas as street vendors or day laborers.
“Informal jobs hurt the economy as they impede growth in productivity and competitiveness,” said Phu Huynh, an economist at the International Labor Organization in Bangkok. “The key issue is not just whether education and training provide workers with enough vocational skills, but also whether these are the right skills that meet the demands of employers.”
About two-thirds of Vietnam’s workforce is involved in informal jobs that are “vulnerable and of low productivity,” Deputy Labor Minister Doan Mau Diep said in September. These workers earn about 3.5 million dong ($164) a month on average, according to a 2012 survey by the Central Institute for Economic Management, a government think-tank. That compares with the 5 million dong in wages, plus benefits such as health insurance, that Cuong said he received.
The number of businesses halted operations or shut down in Vietnam rose 16 percent in the first half 2014 from a year earlier, while new businesses being registered in the first six months fell 4 percent.
Foreign direct investment inflows to Vietnam have risen in recent years as manufacturers, including Samsung Electronics Co. (005930), LG Electronics Inc. and Nokia Oyj, set up factories. Unable to find enough qualified staff, Intel Corp. (INTC), Siemens AG (SIE) and others are funding training programs or giving scholarships to employees to study engineering abroad.
A government program introduced in 2012 to give vocational training to those in rural areas attracted only 25 percent of working-age people there, well below the official 2015 target of 70 percent. Officials have said they may make changes to lure more to attend.
Informal jobs in the non-agriculture sector rose 21 percent in 2012 from 2010, according to CIEM. Even among graduates of vocational training schools, only a third have the knowledge and technical skills that match employer needs, it said.
The Asian Development Bank in September cut its forecast for Vietnam’s expansion this year to 5.5 percent, lower than a government estimate of 5.8 percent. It would be a seventh year of growth below 7 percent, the longest such stretch according to International Monetary Fund data going back to the 1980s.
“It will be a big challenge for economic growth if the shift continues, because it means we have more low-skilled, low-productivity workers,” said Tran Dinh Thien, director of the Vietnam Institute of Economics in Hanoi that advises the government. “It’s worrying.”
Vietnam’s labor productivity is one-fifth that of Malaysia’s, while Singapore’s is almost 15 times higher, the ILO said in a report in May. Nations including Malaysia and the Philippines that are developing a services sector, including retail and call centers, are forecast by the World Bank to grow at a faster pace than Vietnam this year, at 5.7 percent and 6.4 percent respectively.
“Most of our member companies face difficulties in hiring and keeping skilled workers,” said Nguyen Van, vice chairman of the Association of Ancillary Firms in Hanoi, which represents suppliers to many foreign companies. “They train workers; some even offer living accommodations. But many workers still can’t handle the pressure and prefer to go back to informal jobs.”
The weak productivity growth and shift to casual labor are creating economic challenges, said Pratibha Mehta, chief representative of the UN development program in Vietnam. “Significant institutional reforms” are needed to increase competitiveness, she told lawmakers in a September conference.
The average daily wage for a factory worker in Vietnam is about $7, compared with $8 in Indonesia and $12.50 in the Philippines, according to Oliver Tonby, a managing partner at McKinsey & Co. in Southeast Asia. Cheaper labor alone isn’t enough for Vietnam to compete as productivity in the manufacturing sector is lower than in China, he said.
“Vietnam will have to continue to raise its productivity levels to capture a greater share of global manufacturing,” Tonby said, adding that the multinational companies investing in the country can help it transition into higher-value, more complex manufacturing.
Prime Minister Nguyen Tan Dung has said the country’s education system must undergo “comprehensive reform” to meet its industrialization goals. The National Assembly last week approved a plan to revamp schools’ curriculum that the government estimates will cost about $36 million, after an initial proposal for $1.6 billion was criticized by lawmakers as too costly and lacking in direction.
Farm hands harvest rice grain in Can Tho Province, Vietnam. The nation’s economy is showing early signs of being caught in a “low value” trap, with workers shifting to the informal job sector and agriculture farming work.
Government attempts to overhaul the education and training system “should not be conducted in a vacuum, but should be closely related to real manpower needs of businesses,” said Alan Pham, Ho Chi Minh City-based chief economist at VinaCapital Group.
On paper, Vietnam’s labor market looks rosy. The nation has one of the youngest populations in Asia and its unemployment rate in the third quarter was 1.8 percent, among the lowest in Southeast Asia. Yet the jobless rate may not count those who are self-employed or are in the informal economy.
Le Thi Luyen, from the northern province of Vinh Phuc, began selling noodles on the street after she was laid off from a garment factory in Hanoi earlier this year.
“Working in a factory isn’t as good as I expected because of the long hours and strict rules,” said Luyen, 27, who squats on the sidewalk with her noodles, sauces and condiments in two cane baskets on a yoke. “I’m giving it a try for a little longer in the city before I decide whether to go back home to farm or do some other odd jobs.”
There are fewer formal jobs if she decides to stay: The number of businesses that shut down or suspended operations climbed 16 percent in the first half of the year, compared with a 10.5 percent rise in the same period in 2013, data showed.
With the appeal of gaining riches from the influx of factories waning, workers like Cuong are repeating a pattern that’s been common throughout Southeast Asia for centuries: When things get difficult in the cities, go back to the family farm.
Back in Cuong’s village in Bac Giang, his wife is expecting their second child. “I have a house and a farm back there, and it’s always good to be with your family,” he said. “And I have many choices of part-time jobs to do there.”