_<u>Note: In panel a/, the exchange rate was assumed to be undervalued in 2005 if the price level measured in the International Price Comparison Project is</u>_ **below** _the regression line for a given income per capita (in 2005 PPP $). In panel b/, an increase means that the riel is appreciating. Source: WDI and IMF for exchange rate._

# 39. **Labor remains abundant and at low**

**wages** . Labor costs are low, although not particularly low in regards of the level of productivity (Figure 12). There is no sign of firms complaining about regulations (occasional questions raised about the compliance costs of the labor standard program in garments are offset by a sense of the returns to this program). Firms also appreciate the openness to foreign labor (although recognizing that they would prefer hiring Cambodian, in particular for mid-level

**Figure 12: In the garment industry, wages and productivity are not in the low-range any more**

<!-- Start of picture text --> 6,000<br> Thailand<br>5,000<br>4,000<br>3,000 China Philippines<br>Cambodia Average<br>2,000 Vietnam Indonesia<br>Lao<br>1,000 Bangladesh Sri Lanka<br>-<br>- 500 1,000 1,500 2,000 2,500 3,000 3,500<br>Mean wage per worker ($)<br>Mean labor productivity ($)<br><!-- End of picture text --> _<u>Note: based on investment climate surveys; labor productivity and wages are</u> measured in 2004 US$. Source: World Bank (2008d)._ management, to save the cost of expatriates). The main issue raised relates to labor disputes (see below more generally on the lack of institutions for dispute resolution).

**Figure 13: Education levels are increasing from a very low base and the rates of returns to education have decreased**

<!-- Start of picture text --> a/ Net enrollment ratio (%)<br><!-- End of picture text --> <!-- Start of picture text --> 90<br>81.4<br>80<br>70<br>60<br>50<br>40<br>30 24.0<br>20 15.6<br>10<br>2.7<br>-<br>1997 2001 2004 2007 1997 2001 2004 2007 1997 2001 2004 2007 2007<br>Primary Lower Secondary Upper Secondary Tertiary<br><!-- End of picture text --> <!-- Start of picture text --> b/ Returns to education<br>2004 2007<br>10<br>8<br>6<br>4<br>2<br>0<br>Employment Public sector Private sector Urban Rural<br>for wages<br>males females males females males females males females males females<br><!-- End of picture text --> _<u>Note: Returns to education are calculated as the coefficient of the number of years</u> of schooling in a regression of wage salaries (with control variables)._ _<u>Source: 1997, 2001 and 2004 figures are based on the 1997 and 2004 CSES and in the 2001 Child Labor Survey, NIS, Staff.</u>_ 40. **There is no evidence of aggregate skill constraints, although some mismatches have appeared** . Despite the low level of education, returns to education remain low and not increasing in the private sector despite the observed rapid growth (Figure 13). The only exception is probably the mismatch of skills for those that pursue upper secondary and tertiary education, which now trains a lot of “managers” and insufficient numbers of more specific skills (such as accounting, IT). This is also evident in the high turnover, which weakens the incentives for firms to train their staff (World Bank, 2008d). Hence general education should remain the policy priority, with a gradual preparation of the secondary and tertiary sectors. If skills are not a major constraint (yet), vocational training is probably an exception given the possibility of addressing immediate needs of existing firms: but here the issue is more one of coordination (see below).

**Figure 14: Poor access to electricity is a serious constraint on businesses** a/Value Lost to Power Outages (% sales) b/ Electricity from Generators (%, manufacturing

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