other half is more temporary workers, at least with regard to their actual contracts— though many may actually be on the job as much as those with long-term contracts. The least stable of all industrial sectors is construction, where most workers are temporary workers. Construction workers commonly work as farmers at harvest times and then come into the city to supplement their incomes. Service jobs in the formal private sector are generally more secure. About two-thirds of service workers have long-term contracts. The issue of avoiding labor fees through use of short-term contracts is likely to be less of an issue for service companies, given their smaller size.<sup>25</sup> Service firms also frequently hire more educated workers and may feel more of a need to sign longer-term contracts to guard against high turnover.

# **<mark>Box 4.4 The Case of Xuan Thu Company: Seasons Change, Workers Change</mark>**

<mark>Pham Dung is the 29-year old owner of a private construction company with seven official employees: a secretary, an accountant, two technical engineers, a main construction expert and two sales people. At times, however, Mr. Dung’s company, Xuan Thu Company, employs as many as 140 full-time workers. Unless it has no ongoing projects, Xuan Thu Company actually rarely dips below 18 employees. But as far as labor authorities and, in all likelihood, statistics officials are concerned, employment with the firm stands at just seven.</mark> According to Mr. Dung, short-term labor contracts are the only possible way to operate <mark>effectively in the construction business. When Xuan Thu has a project to build a villa, it needs 20 workers; when repairing a neighborhood water system it may be just seven workers; building a runway at the airport, in turn, requires 130. No firm manager wants to pay workers when there are no projects, he says. And workers don’t want to be tied to relatively low paying contracts during downtime when they could be working for more pay on a different project for a different firm. According to Mr. Dung, “Total income is much more important to them than stability. Workers want to maximize their time as they are overwhelmingly from the countryside, often coming in groups from far off provinces in other regions of the country when there are no crops to tend to at home. Even so, they often go months without work – on average about three months</mark> of the year.” 33. There may be a number of reasons why workers are not given long-term contracts. One would be the highly seasonal nature of many private sector activities. Private enterprises are relatively small in size and cannot afford idle labor. Consequently they are able to wait to hire short-term labor until a specific need arises, for example at the time of a large order. In the context of high rural underemployment and significant urban unemployment, employers do not find it difficult to find temporary workers when they need them. Social security regulations and official labor fees are also given as a reason by many employers for why they do not recruit workers on a more permanent basis. Social security taxation is 20 percent, which many enterprises consider too high. Employers also complain that contracts are only binding on them and not the employee and claim to have significant turnover among their staff—particularly among lowerskilled manufacturing workers.

> 25 Labor fees become a significant cost only after a firm grows to beyond 10 employees.

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