relatively high minimum wage may reduce its attractiveness to export-oriented foreign investors and hold off some new investments. Furthermnore, our case study in Haiphong shows that many foreign companies are just one of several affiliates established in different Asian countries. This means that investors are able to quickly shift part of their production to affiliates in more competitive countries.

Few investors, however, seem to complain about labor costs, whose importance must certainly be weighed against the costs linked to restrictive foreign exchange regulations, poor infrastructure, opaque bureaucratic procedures, difficult access to land, expensive utilities and services, unfavorable business laws, and -not the least- a certain degree of unpredictability in the Government's policies towards foreign investors. Indeed, labor costs are only part of what defines competitiveness. There seems to be much scope in Vietnam for cost-saving reforms other than those that reduce the purchasing power of workers. At less than $2 a day, labor costs in Vietnam remain very low and attractive by international standards.

# _II.IL Non-wage compensation_

When minimum wages are high and enforced, payroll taxes to finance non-wage benefits may further increase labor costs, erode export competitiveness and hurt employment. On the other hand, if minimum wages are poorly enforced or set at levels below market wages market forces are likely to lead to a substitution between wages with non-wage compensation. In such a case, non-wage benefits (or payroll taxation) usually reduce take-home pay without substantially affecting labor costs (see Mclsaac and Rama, 1997 or Gruber, 1997). But here again, the extent to which such substitution between wages and non-wage benefits happens in practice depends on the extent to which non-wage benefits can be enforced.

## **_a) The_** _Regulations_

The Labor Code provides for a certain number of non-wage benefits. In this area, there are no distinctions between domestic and foreign invested companies. Since the adoption of the Labor Code in 1995, contributions to the social insurance fund are mandatory in all enterprises that employ more than 10 workers: employees must pay 5% of their wages and employers a further 15% of workers' wages. For businesses that employ fewer than 10 people, or for employees with contracts shorter than 3 month, social insurance allowances have to be directly included in take-home pay. The social insurance fund benefits workers in case of occupational disease, workplace accidents, maternity, retirement or for death allowances (there is no unemployment insurance in Vietnam so far). The replacement rate is generally 75% of wage levels. In addition to social insurance, employers and employees are also subject to mandatory health insurance: employers must contribute 2% of workers wages and employees 1%.

# _b) Evidence:_

In Vietnam, compliance with non-wage regulations is very poor. According to data from the Vietnam Social Security (VSS), out of about 40 million workers only 4 million are covered by social insurance. And out of these 4 million, only 380,000 are private sector workers. Such low compliance is a typical problem in developing countries, where too few 22