Synoptic Revision - Micro and Macro Effects of a Minimum Wage

In this video we consider synoptically some of the micro and macro effects for Vietnam of a decision by their government to increase the minimum wage.

Vietnam increases their minimum wage

The Vietnamese government has announced that the minimum monthly wage will be raised to between $142 - $204. This would be the first minimum wage hike in two years in the Southeast Asian country, which is a regional manufacturing powerhouse with a population of 98 million. Vietnam is a key labour-intensive hub for products such as garment and footwear. The IMF forecasts that real GDP growth will be 6% in 2022 with consumer price inflation expected to be 3.8%.

Evaluate the likely microeconomic and macroeconomic effects of a rise in minimum wage rates in countries such as Vietnam. (25)

Micro Aspects

• Impact on individuals in the labour market – potential for higher incomes – reduction in absolute poverty – increased spending – improved nutrition, education, access to health care – development progress. Might encourage more people to enter the formal labour market and increase female labour market participation.
• Impact on Vietnamese firms – increase in wage costs (variable costs) leading to a possible fall in profits and investment and perhaps a contraction in employment
• Possible impact on competition within markets – smaller firms might shut-down, leaving larger textile firms with an increased market share

Macro Aspects

• Inflation – IMF forecasts 3.8% inflation – risk that this will increase with higher minimum wage (possibility of both cost-push and demand-pull inflation) – Use AD-AS analysis
• Exports, FDI and Economic Growth – Vietnam relies heavily on export-led growth in garments / footwear – rising unit labour costs might reduce their price competitiveness – worsening of net trade would affect growth (forecast 6% in 2022) might be a fall in inward FDI from TNCs – such as reshoring of manufacturing
• Government finances – Vietnamese government would have to pay the higher minimum wage – increased spending – risk of a rise in their fiscal deficit – but tax revenues might also increase

Evaluation perspectives

Which of the effects – micro and macro are likely to be most significant?

Micro impact – many Vietnamese firms are labour-intensive – so higher MW likely to impact on costs – but depends on what happens to labour productivity. Might accelerate process towards capital-labour substitution

Macro effect – minimum wage reduces SRAS (inflationary) and will also affect aggregate demand – but increased productivity would raise LRAS. Consequences for Vietnamese exporters depends in part on the exchange rate.