State Ownership and Labor Redundancy: Estimates Based on Enterprise-Level Data from Vietnam

Privatizing or restructuring state-owned enterprises may lead to mass layoffs, but the number of redundant workers is usually unknown beforehand. This paper estimates labor redundancy by comparing employment levels across enterprises with different degrees of state ownership. State-owned enterprises are modeled as a hybrid between labor-managed enterprises and profitmaximizing enterprises, with the profit motive becoming less prominent as the state share of capital increases. This model leads to an employment equation that is estimated using an enterprise database from Vietnam. The database, constructed especially for this paper, includes roughly one third of fully state-owned enterprises, one third of fully private enterprises, and one third of joint ventures between the state and the private sector. The employment equations control for sector of activity, region and age of the enterprise, among other variables. Based on the results, if the state share of capital was brought down to zero roughly half of the workers in the corresponding enterprises would be redundant. This is more than ten times the estimate by the current directors of the enterprises. The results also show a wide dispersion of redundancy across sectors of activity. Finally, the paper analyzes the correlation between the estimated labor redundancy and twelve ad hoc indicators of profitability, productivity and labor cost. It shows that the correlation is weak. But the correlation between most ad hoc indicators is weak too, which suggests that they are not a reliable tool to identify the most over-staffed enterprises. * Support for the preparation of this paper was provided by the ASEM grant for Social Safety Nets (TF 020714) and the World Bank research project on Public Sector Downsizing (RPO 683-67). Access to the MPDF data was possible thanks to Leila Webster. Nguyet Nguyen Nga provided valuable help with the field work in Haiphong. Valuable comments and suggestions were received from Kazi Mahbub-Al Matin. The views in the paper are those of the authors. They should not be attributed to the World Bank. Correspondence related to this paper should be sent to [email protected].