Salaries and Inflation: A Tough Race

Over the past 10 years, from 2002 to 2011, the minimum salary has been adjusted seven times. However, no official statistics has been available to analyze the relation between changes in salaries and the variations of inflation and the economy.

 

 

According to Dr Nguyen Quang A’s calculation method presented at the conference on direction of reforming government officials’ salaries from 2011 to 2020 held in the end of last year in Ho Chi Minh City, the salary rise level could be calculated based on the previous table.

 

Accordingly, from 2001 to 2010, the currency has lost 2.154 times its value (multiplying (1 + CPI) of all years). The GDP growth in the same period was 2.172 times while the minimum salary has risen 3.952 times

 

Take the quotient of the minimum salary and currency devaluation, we have the real salary rise (3.952/2.154 = 1.83 times), a little bit lower than GDP (2.172).

According to Dr Nguyen Quang A, it could be the main reason for the minimum salary adjustment.

 

Also based on the table, it can be seen that there are three pairs of years without any salary adjustment including 2001-2002, 2003-2004, 2006-2007. There is a big inflation rise in the year before the adjustment.

 

 “The adjustment policy is always late (at least) one year, and perhaps, mainly as a response to pressure from the public,” Dr Nguyen Quang A analysed.

However, he also said that the state policy has, to some extent, adjusted the salary according to inflation, and the adjustment is based on the past inflation.

 “This adjustment method is better than the one that is merely indexation, i.e., the salary is adjusted according to CPI, because indexation is risky. It deepens the “period with inflation” and could be a factor which pushes inflation into an uncontrollable spiral,” Dr Nguyen Quang A said.

 

However, commenting on this calculation method, the economic expert Pham Chi Lan said inflation has changed in a more complicated way than what is shown in the table and has badly affected government staff and people who work for payment, especially people who have low salaries and do not have any other income except salaries.

 

Inflation reflects the average price rise in the economy, but the price rise rates are very different from people of different salaries if the calculation is based on the relation with salaries, while the number of people with low salaries takes a large account. In addition, lots of expenses increased but they are not added into inflation.

 “An in-depth evaluation of this issue is necessary in order to avoid the assumption the policy that the salary is adjusted when there is inflation as it has recently is beneficial to all salary receivers.”

 

The public is worried that enterprises and small businesses will take advantage of the situation when salaries rise. Many government staff desperately talk to themselves “please don’t raise salary” because salary rise cannot catch up with inflation.

 

Talking with reporters recently, Mr Nguyen Tien Thoa, Head of Price Management Department (Ministry of Finance) affirmed that like previous times, the government did not print more money in this salary rise. The resource is from the achievement of economic growth.

 

 “In principle, there is no increase in money amount in the economy, so there is no pressure on the average price,” Mr Thoa said. “However, there is still pressure on the price as the consumption on services increases. This consumption directly goes into prices of goods, products which are added with sellers’ psychological factors of ‘regulation’.”

 

Carefully looking at the previous minimum salary rise, the salary adjustments had a little impact on the average price in the following months.

 

For example, in January 2009, when the minimum salary was raised to VND 650,000, CPI of that month increased 0.32 percent and 1.17 percent in the next month (with the effect of Tet holiday). By March, CPI was just 0.17 percent.

 

Last year, after the basic salary was adjusted to VND730,000, CPI of the 3 following months fluctuated from 0.06 percent to 0.23 percent, the lowest level in the year.

Therefore, many experts agreed that this salary rise would not result in too high prices.

 

 “To be objective, there was a huge increase in prices before the salary was raised. It was over people’s ability to pay, so when the salary was raised, they are still thriftier” said Mr Nguyen Minh Phong, Head of Department of Economic Studies, Hanoi Institute for Socio-economic Development Studies.

 

Mr Phong added that in the past, whenever the salary was raised, the price also followed, because at that time, other factors were stable, and there were no other increases such as gold or USD, but only the salary rise. While there have recently been other shockingly continuous rises, however, salaries do not significantly rise.

 

For example, while the fuel price has risen 40 percent, salary increase by 10 percent does not help. Food price has increased to the critical point. Official statistics shows that it has increased 40 percent, but in reality, some product prices have increased 70 percent, even 100 percent.

 

 “Sellers will not raise the price if they do not want to lose customers,” Mr Phong commented.

 

Mr Vu Dinh Anh, an economic expert, said that if enterprises want to adjust the price, they need to wait for the production cycle. They cannot randomly raise the price whenever they want.

 

Enterprise leaders have to consider adjusting the price according to the production cost and pressure to raise the salary from employees. Enterprises usually have to self-adjust with the expectation of inflation increase. However, if the price is too high, the enterprise will be rejected by the market.

 

Dr. Cao Sy Kiem, Former Governor of the State Bank of Vietnam, said that the salary rise and the adjustment of electricity price on 1^st June will significantly affect prices in the market. However, Mr Kiem predicted that CPI in May will not be as high as it was in April.