Informality in Viet Nam: Trends, drivers and implications

Informal employment in Viet Nam has decreased significantly over the past decades. This was supported by multiple factors, including (i) strong economic growth, (ii) a shift in employment both across sectors (i.e. from agriculture to manufacturing and services) and employment statuses (i.e. from contributing family work and own-account work to wage employment) and, (iii) an increase in the skills and productivity of workers, due to higher educational attainments and enrolment in training.

Additionally, the Vietnamese government has supported formalization through interventions in several policy areas, including by improving the legal and policy framework, increasing the incentives for workers and businesses to formalize as well as expanding social insurance coverage.

Despite this progress, informality remains high, especially among certain categories of workers and businesses. These include young and old individuals, workers with low educational attainments and individuals in agriculture. At the same time, certain business types, such as individual and household businesses, are characterized predominantly by informal employment.

Further progress to increase formal employment might require strengthening the legal and policy framework and clarifying the provisions that apply to different types of businesses and workers. In particular, the legal status and definition of household businesses, individual businesses and private enterprise is not coherent, which may generate a disincentive to formalization.

The expansion of social insurance is also a key policy tool to promote the transition from the informal to the formal economy. However, legal and monetary barriers still limit social insurance coverage, especially among disadvantaged groups of workers. The links between social protection and formalization policies could be strengthened.

Additional efforts could also be made in order to simplify registration procedures and other administrative requirements. Specifically, many unregistered businesses still report complex administrative processes as one of the main reasons for not registering. Communication and information campaigns could also be implemented.

Finally, interventions to support business development (e.g. preferential tax regimes, access to public procurement) and workers (e.g. expansion of social insurance, provision of training) could also be considered. This is to increase the probability that workers and firms who have already transitioned from the informal to the formal economy remain in the formal labour market, but also to support individuals that face high levels of vulnerability in the informal economy to move closer to formality.