Given Samsung’s large existing presence, the increase in other major industry players is more than welcome for Vietnam, allowing for a greater diversity in knowledge flows.

The unemployment rate reached 2.28% in the third quarter, levels not seen since the onset of the COVID-19 pandemic. The labour force and labour force participation rate reached 51.9m and 68.7% respectively by the end of 3Q22, continuing their upward trajectories since the lockdowns in 3Q21. The resumption of broad economic activity in Vietnam has subsequently led to improvements in labour market conditions, and indicates that the domestic economy is well on its way to full strength.

In particular, the revival in demand for services-related labour has been notable, with the General Statistics Office (GSO) noting that this sector has seen the largest inflow of new workers on average. The high demand for labour is also reflected in earnings data, with average monthly earnings further strengthening upward. Based on World Bank estimates, workers are switching back from agriculture to non-agricultural jobs, and moving from informal to formal employment as urban activity bounces back.

So what comes next? HSBC said Vietnam’s economy would be continuing to observe a secular transition. Vietnam has come a long way in changing the structure of its labour market, moving towards higher value-added manufacturing and tertiary services from agricultural employment. The labour market has also benefited from its demographic dividend, with World Bank estimates of a working-age dependency ratio below 50% since 2006.

Within the manufacturing space, Vietnam has mostly attracted manual jobs such as component assembly. This takes advantage of Vietnam’s competitive advantage in terms of wages. According to the Japan External Trade Organization (JETRO), manufacturing worker wages paid by Japanese companies in Vietnam are just over half those paid in Malaysia and Thailand. Another factor comes from the high attainment of general education in the Vietnamese populace, attributable to successful governmental reforms to education during the 2000s and 2010s.

“For Vietnam to continue its growth momentum, developing new competitive advantages for its labour force is important. Improving education and further investing in human capital has already been highlighted as one of the pillars for the government’s socio-economic development strategy for 2021-2030. As Vietnam moves past the COVID-19 pandemic, the government can reassert efforts to invest in human capital to improve labour productivity, which is essential, especially as demographics tilt towards an older populace”, said HSBC.

Although Vietnam has achieved a high attainment of basic education, more can be done to increase the uptake of tertiary education. Among the ASEAN-6 peers, the uptake of university education in Vietnam (Bachelor’s and above) for those aged 25 and above is estimated at 10% in 2019, lower than 12% for Malaysia and 16% for Thailand. And while the quantity of tertiary graduates may be a factor, there is an argument that there is a corresponding lack of high-skilled jobs in the region, which may feed into a loop of suppressing the skill and wage-related returns from tertiary education.

Right now, unskilled jobs still make up a quarter of the Vietnamese workforce. ILO has estimated that only 9% of occupations could be categorised as high-skilled in 2021, versus 65% in Singapore. Reducing the high opportunity cost of tertiary education can therefore be an effective consideration for the government to act upon.

Looking more closely at the supply of education, the World Bank estimates that public education spending averaged 5% of GDP between 2004 and 2019. If we look at tertiary education on its own, expenditure on tertiary education was 0.6% of GDP in 2019, lower than 0.8% observed for Malaysia in 2020. Given the prominence of the public sector in tertiary education spending for Vietnam at around 80%, increasing funding to this category is a positive step to upgrading the workforce.

In addition to funding, there is room to further improve the structure of vocational training. Headlines about expanding higher value-added production paints a positive picture, but existing firms are already experiencing recruitment difficulties due to a mismatch in skillsets. A World Bank enterprise survey in 2019 found that 68% of Vietnamese firms faced challenges in recruiting employees with the technical skills required for the respective job. Cognizant of this friction, steps are actively being taken by authorities. Hanoi aims to raise the quality of vocational training by taking steps such as modernising equipment and curricula, striving for 80% of vocationally trained workers to possess information technology skills by 2025.

That said, the Vietnamese workforce is indeed being increasingly exposed to higher value-adding skills and knowledge. There are signs that the gains in manufacturing are flowing to a wider variety of more complex products. Foxconn, a major Apple supplier, recently invested an additional USD300mn to expand its operations in Vietnam. Its intentions of producing more technologically advanced products such as the Apple Watch are signs that the Vietnamese workforce is making progress up the manufacturing value chain. A heavyweight in the higher value-added software business, Synopsys, has also recently announced it is expanding its chip design operations, and more importantly, locating some training of engineers to Vietnam. Given Samsung’s large existing presence, the increase in other major industry players is more than welcome for Vietnam, allowing for a greater diversity in knowledge flows. The steady inflow of FDI into Vietnam has also contributed to more sustainable employment, with the General Statistics Office noting that formal employment is increasing by more than the informal sector.

All in all, in HSBC’s view, developments in Vietnam’s labour market continue to be positive. The support, recovery and improvement in the labour market have been encouraging, but this is mostly due to the economy recovering from the brunt of the pandemic. Longer-term, the focus will be on further measures to upskill the Vietnamese workforce in order to boost productivity and sustain its growth momentum.