Why Vietnamese Wages Are So Low (and Why They Can’t Stay That Way)

Image credit: LaoDong.vn

Wages in Vietnam are among the lowest in SE Asia: the average salary in 2022 was estimated to be 275 USD/month (approximately 6.5 million VND/month) according to Manpower Group’s Total Workforce Index Report. Compare this to a global average of 2,143 USD/month, a regional average of 1,770 USD/month, and the Chinese average of 1,330 USD/month.

With a 6% increase in the Vietnamese minimum wages for 2022 (source), and some of the world’s fastest GDP growth, how long can Vietnamese wages stay so low?

We argue that Vietnamese wages cannot remain low for long. In this article, we highlight how a one-time quirk of socialized-housing kept salaries very low for two generations. We also highlight the inklings of a large economic shift that will lead to higher wages — a lot higher.

Raising salaries will counteract the willingness of foreign firms to pour FDI into Vietnam — Vietnam has recently been the prime beneficiary of international brands seeking to diversify their manufacturing-base and supply-chains away from China. Such FDI may slow or halt altogether in the next decade.

OUR THESIS: Vietnam experienced a one-time land reform policy that endowed older generations with household wealth, and kept homeowners debt-free — this dampened income-pressures that would otherwise compel young families to qualify for mortgages and compete on the housing market. These past housing policies are not reproducible, and salaries will need to adjust higher to satisfy younger generations’ need for housing.

Low Wages in Vietnam — Proximate and Ultimate Causes

First, let’s clear the air about proximate explanations for why Vietnamese salaries are low (versus ultimate explanations, below). Here are a few popular proximate explanations for Vietnam’s low-salaries:

• Vietnam is largely agrarian and low value-add.
• Vietnamese wages are catching-up from a lower baseline due to a legacy of socialism.
• Real wages are underestimated, due to the prevalence of off-the-books “informal” income, as well as Tet bonuses.

Each of the above explanations a kernel of truth, but they are not, in and of themselves, the ultimate explanation…

A Generation That “Owns” Its Home

According to the 2019 Census, the home-ownership rate in Vietnam is 88.1%. Compare this figure to 66.5% in Western countries like Canada (source). The Vietnamese government happily touts this statistic as being among the highest in the world.

Furthermore, and more importantly for salaries, most Vietnamese home-owners are mortgage-free. Not only are they mortgage-free, but they never had a mortgage to begin with, having been “gifted” the land from the government (more on that below).

To understand the impact of such a housing-policy, do the following thought-experiment: what kind of salary would you need if you never had to pay rent or apply for a mortgage? Even in Canada, one could squeak-by on a third-world salary, if neither rent nor mortgage costs were ever an issue.

KEY POINT: Due to fact that the overwhelming majority of Vietnamese owned their own homes and never had to pay mortgages, Vietnamese salaries were artificially dampened. This effect continued through recent decades, even during Vietnam’s meteoric rise in GDP.

Free-homeownership is how old ladies can sell soup on the street for less than a dollar and still afford an Android phone, or how plumbers can charge less than $4 USD for a house visit. Free historical homeownership is why so many labour-intensive services are head-scratchingly cheap in Vietnam — a huge mass of workers could compete via lower wages, without fear of household insolvency.

But now things are changing… more on that below.

The One-Time Gift of Freehold Property Ownership

High home-ownership, few mortgages, low rental rates — what is the story behind Vietnam’s enviable home-ownership statistics?

The current elderly generation of Vietnamese home-owners (>age 60) had their homes and land gifted to them by the government. Sometimes, this was a relatively benign event; for example, government workers were provided with tiny 200 sqft one-room houses on government-controlled land. Almost everyone worked for the government during the ’70s and early ’80s, because there was no (legal) private commerce, no free market, and no private property. Everything from the military, to food distribution, to bicycle manufacture, to garment distribution were state-controlled. Therefore, almost the entire population was the beneficiary of government housing- and worker-policies.

Initially, these government-controlled domiciles were not owned by the occupants (in the capitalist sense). In fact, no one “owned” anything during the socialist Subsidy Era. It was only later, after the 1986 Doi Moi free-market reforms and reinstatement of private property rights, that the occupants were granted freehold ownership of their homes.

Once the Vietnamese literally owned their own homes, their bleak one-room houses were gradually renovated into tall multi-story houses — one addition after the other. 30 years later, we have the iconic Vietnamese cityscape of narrow 5m houses that are 5 stories tall, balconies spilling over with household paraphernalia, and which sell for over 1 billion VND on the resale market.

Not So Benign Property Policies

While the above housing-policy seems like a success, in retrospect, there were many other not so benign land-transfer schemes as well — land-owners before socialism lost everything, and once-homeowners were forced to take-in dozens of people to co-habit with them in squalid crowded conditions (like in the film Dr. Zhivago).

Likewise, the government had a program of gifting “undeveloped” land in the south and in the highlands to ethnic Viet/Kinh people of the north, as an active form of colonization and Vietization of the country-side, and against the wishes of the ethnic minority peoples whose land was being redistributed for the benefit of northerners. Some of these people had been at war against the Kinh for hundreds if not thousands of years.

I’ve Got 99-Problems But the House Ain’t One

While the Subsidy generation didn’t have to qualify for mortgages or worry about FICO scores, it is emphatically not the case that they lived some sort of idyllic lifestyle. They had other problems, such as feeding themselves during food scarcity and poverty of the command-and-control subsidy era.

Fast-forward to today, this generation is cashing-in on its massive housing dividend — many will finance their current retirement by using the proceeds of home-sales (now worth hundreds of thousands of USD). Some will cash-out their urban home-equity to purchase property in their childhood homelands, where land and construction prices are lower.

Many elderly Vietnamese regret not having done more in their youth to take advantage of the old-timey land-grab. Many of them now have children who struggle to find affordable housing.

Generational Echos of Past Land Reforms

The back-to-back events of a) government-provisioned collectivized housing-units, followed by b) freehold land reforms, were one-time events in Vietnam’s tumultuous history. We argue these events kept salaries relatively low, and allowed the elder generation to easily (and accidentally) build a lot of wealth. This is not reproducible.

In contrast, today’s young Vietnamese must compete in the resale market to acquire land or housing. Resale houses are often >20-30 times the average annual salary of a Vietnamese urbanite (or 62x GDP per capita). Mortgage interest-rates are also very high and not buttressed by a mature banking-system armed with extensive FICO-data. Nor do Vietnamese savers have a lot of savings vehicles available to compound wealth (e.g. Vietnamese citizens are not allowed to own international stocks, and inflation has typically eroded the nominally-high bank interest-rates of 5-8%/a). This means it is very difficult for young people to qualify for mortgages, nor can they easily invest and grow their wealth help finance all-cash purchases.

Instead, the majority of young Vietnamese rely on their parents to help finance home purchases — it is the responsibility of Vietnamese parents to provide their newly-wed sons with housing (or, more commonly, a condo). This is not like North America, where it is considered a generous “gift” for Boomer parents to assist their children’s down-payments — it is much more obligatory in Vietnamese culture.

We argue that this dynamic is not sustainable — today’s Vietnamese parents who are financing their children’s home-acquistion are also riding the wave of Vietnam’s one-time Socialist land-reforms. Many parents were able to acquire a lot of cheap land after Socialism — land was available for the same price as a motorbike. This one-time acquisition of wealth contrasts with future generations of Vietnamese parents who will be less property-rich.

As the benefits of Vietnam’s one-time land-reforms fade into the past, there will be more pressure on the salaries of young urban professionals who need to buy condos or houses. The salaries of mid- to high-end managers and other new-economy professionals are already comparable to those of Western countries.

Will Downward Pressures Persist?

The ramifications of a truly free-market housing-market will take time to reverberate throughout the economy and culture. The pressure on salaries will likely be mitigated by a few cultural counter-forces, including:

• Intergenerational living – Traditionally, once the eldest son gets married, his parents will move in with the newly-weds to help raise the grandchildren.
• Declining birth rates – Vietnamese birth-rates have declined a lot since the mini baby-boom after the Doi Moi economic reforms (today’s Vietnamese Millennials). Such declining demographics may eventually put deflationary pressures on home prices.
• High-density living – Traditionally, the Vietnamese prefer high-density houses along transit arteries (where is easier to run a business and park a car) and/or condominiums in master-planned communities. Even where people own detached houses, the buildings are typically very thin, tall, and yardless. This means there is less artificial scarcity and NIMBY’ism to inflate prices in desirable cities.

While such factors may help blunt the impact of the rising cost of housing, Vietnamese house-prices are still growing at a rapid clip, averaging a 17%/year increase between 2018 to 2022, nearly doubling over 4 years (source).