Causes of labor retrenchment in vietnam evidence from firm based data

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUES

VIETNAM

THE NETHERLANDS

VIETNAM – NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

CAUSES OF LABOR RETRENCHMENT IN
VIETNAM: EVIDENCE FROM FIRM-BASED DATA

By
NGUYEN THI THANH NHAN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2012

A


UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUES

VIETNAM

THE NETHERLANDS

VIETNAM – NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

CAUSES OF LABOR RETRENCHMENT IN
VIETNAM: EVIDENCE FROM FIRM-BASED DATA

A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By
NGUYEN THI THANH NHAN

Academic surpervisor
Dr. PHAM KHANH NAM

HO CHI MINH CITY, DECEMBER 2012

B


ABSTRACT

Labor retrenchment is one of the most important issues of enterprises during the
reform process in a transition economy, especially in the market economy. In the
recent years, the number of labor fired in Vietnamese enterprise has risen rapidly.
The question of whether which factors impact on labor retrenchment in firms is still
considered. Therefore, this paper examines the causes of labor retrenchment in
Vietnam. I focus on micro, small and medium enterprises using firm-level in Small
and Medium Vietnamese Enterprises Survey in 2009. Using descriptive statistic and
regression model, the results are found that enterprise’s performance measured by
output; training cost for labor, wage rate; factors such as debt, firm age, firm size
and competition; impact on the degree of labor retrenchment. Technological
innovation measured by equipment investment affects labor retrenchment in a firm
insignificantly.

KEYWORDS

Labor retrenchment
Micro, Small and Medium Enterprises
Vietnam

i


TABLE OF CONTENTS
Page
ABSTRACT………………………………………………………………………..i
TABLE OF CONTENTS…………………………………………………………ii
LIST OF FIGURES, TABLES AND GRAPHES ……………………………...vii

1. INTRODUCTION…………………………..………………………………......1

1.1 Problem statement……………………………………………………………..1
1.2 Research objectives and research questions…………………………………3
1.3 Data resources and research methodology…………………………………...4
1.4 Structure………………………………………………………………………..5

2. LITERATURE REVIEW...…………………………………………………......6
2.1 Definition………………………………………………………………………..6
2.2 Theories…………………………………………………………………………7
2.3 Empirical studies on determinants of labor retrenchment………………...12
2.3.1 Empirical studides before 2000 year……….………………………13
2.3.2 Empirical studies after 2000 year…………………………………..15
2.4 Summary……..………………………………………………………………..18

3. RESEARCH METHODOLOGY…………..…………………………………20
3.1 Data……………………………………………………………………………20
3.1.1 Data resources and sample size……………………………………20
3.1.2 Variables…………………………………………………………….21

ii


3.2 Research methodology……………………………………………………….21
3.2.1 Conceptual framework……………………………………………..22
3.2.2 Model……………….………………………………………………..27
3.2.3 Variable descriptions...……………………………………………..29
3.2.4 Summary...…………………………………………………………..36

4. ANALYSIS RESULTS………..……………………………………………….44
4.1 Regression results……………………………………………………………..44
4.1.1 Descriptive statistics………………………………………………....44

4.1.2 Regression results……………………………………………………49
4.2 Summary..……………………………………………………………………..52

5. CONCLUSIONS………..……………………………………………………...53
5.1 Conclusion……………………………………………………………………..53
5.2 Recommendation……………………………………………………………...55
5.3 Limitation……………………………………………………………………...56
REFERENCES…………………………..……………………………………….viii
APPENDIX….…………………………………………………………………....xxi

iii


LIST OF FIGURES, TABLES AND GRAPHES

FIGURE 2.1 Determinants of labor retrenchment in empirical studies……..19
FIGURE 3.1 Conceptual framework …………………………………………...23

TABLE 3.1 Sample distribution………………………………………………....30
TABLE 4.1 Summary statistics…………………………………………………..44
TABLE 4.3 Regression results…………………………………………………...49
TABLE A1 Empirical studies summary…………………………………………xi
TABLE A2 Criteria for small and medium enterprise according to the decree
No. 56/2009 NĐ-CP dated 30 June 2009 of the government……xvi
TABLE A3 Variable discriptions………………………………………………..
Table A4 Correlation matrix of dependent and independent variables in
efficiency model
GRAPH 4.1 LARERA (used in Tobit model)…………………………………...46
GRAPH 4.2 LARERA (used in Logit model)…………………………………...46

iv


1.

INTRODUCTION
1.1 Problem statement

Vietnam is a transition economy, changing from a centrally plan economy to market
economy, specifically, being introduced the so-called Doi Moi reforms to make its
transition in 1986. In July 1995, Vietnam became the seventh member of
Association of Southeast Asia Nations. In the early 2000s, Vietnam integrated into
the large world of economy rapidly. Moreover, Vietnam has been a member of
World Trade Organization in 2006, making more investment opportunities to
develop economy.
In the overall view related to economy, through assessment of international
organizations, Vietnam’s economy has significantly grown. First, according to the
evaluation report on the investment environment of the World Bank and
International Financial Company, Vietnam’s economy ranked from 91st among 178
economies in 2007 to 93rd among 183 economies in 2009. (General Statistic Office,
2010) In terms of two indices of “loan” and “contract implementation,” they were
improved remarkably. More specifically, “loan” index ranked from 43 in 2008 to 30
in 2009, meaning that it improved 13 steps. “Contract implementation” index
ranking from 42 in 2008 to 32 in 2009, improving 10 steps. (General Statistic
Office, 2010) Furthermore, World Bank assessed that Vietnam had considerably
improved both tax area and international trade area. Moreover, Vietnam had many
efforts in improving the business environment. Therefore, Vietnam will create a
more favourable business environment to develop enterprises and to attract foreign
investment in the coming years. Second, according to assessment of United Nations
Conference on Trade and Development (UNCTD), Vietnam has improved many

factors in the business environment, and Vietnam was one of the top fifteen
countries attracting more foreign direct investment (FDI) in the world. As an
illustration, China, The United States, India, Brazil and Russia are five most
attractive countries to FDI in the world in the period of 2009 to 2011. Meanwhile,

1


Vietnam was one of fifteen countries in attracting FDI in that period, being one of
the top six countries attracting investors from Japan and other developing countries
in Asia. Finally, although international organization assessed that Vietnam has
implemented many policies to improve the business environment in the recent
years. However, there are many fields needed reform to enhance the national
competitiveness capacity, and to impact positively on the business performance of
all enterprises.
In the specific view related to enterprise’s development in Vietnam, the number of
enterprises increased fast in 2009. According to survey of General Statistic Office
in 2010, up to 1 January 2009, non-state-owned enterprises increase rapidly in terms
of quality, creating jobs for workers. To illustrate that number of active non-stateowned enterprises was 196779 enterprises, accounting for 95.7% total enterprises,
being equal 5.6 times as many as that in 2000. In terms of micro, small, and
medium enterprises, the number of firm increase significantly. Although there are
many firms established in the recent years, there is the large labor retrenched.
Undeniably, in the transition economies and developing countries, the labor
retrenchment in enterprises is one of the most important reform programs. In the
foreign countries, there are empirical studies related to determinants of labor
retrenchment in state-owned enterprises. They found that there is the relationship
between firm size, productivity and hiring standards, meaning that firm behavior in
which firms choose to hire standard to maximize profit’s impact on labor
retrenchment in a firm. (Weiss, 1984) Furthermore, the development of technology
affected significantly on the labor retrenchment in firms. A large number of

enterprises faced labor surplus after applying modern technologies. Therefore,
retrenchment of labor is a very crucial problem of enterprises during the transition
process to the market economies, especially in the market economy with
competition among firms. (Pinto et al, 1993)
According to these reasons, this paper determines which factors impact on the labor
retrenchment program in micro, small, and medium enterprises in terms of firm-

2


level, using data set from Vietnamese Small and Medium Enterprises survey in
2009.
1.2 Research objectives and research questions
Research objectives
The main objective is to investigate determinants of labor retrenchment in
Vietnamese Micro, Small and Medium Enterprises1 using the firm-level data in
2009.
Research questions
This study seeks to address the following questions:
Main question
Which factors affect labor retrenchment in micro, small, and medium enterprises?
Sub-questions
Questions related to enterprising performances:
 Is there the negative relationship between the degree of labor retrenchment
and output?
 Is there the negative relationship between the degree of labor retrenchment
and training cost?
 Is there the positive relationship between the degree of labor retrenchment
and wage rate?
 Is there the positive relationship between the degree of labor retrenchment

and debt?
Questions related to technological innovation:

1

Criteria to for a micro, small, and large medium enterprise according to the decree No. 56/2009/NĐ-CP
dated 30 June 2009 of the Government is presented in Table 2 in appendix

3


 Is there the positive relationship between the degree of labor retrenchment
and technology equipment investment?
Questions related to other factors:
 Is there the positive relationship between the degree of labor retrenchment
and firm age?
 Is there the positive relationship between the degree of labor retrenchment
and firm size?
 Is there the positive relationship between the degree of labor retrenchment
and competition?
2.

LITERATURE REVIEW
2.1 Definition

Definition needing to be focused is labor retrenchment. According to empirical
studies, labor retrenchment is defined as the labor reduction, and the ratio of a labor
reduction is defined as number labor reduction in the current period divided by the
total labor force of the preceding period. (Hu & Wong, 2004) Another definition,
labor retrenchment is defined as labor discharged and the rate of labor discharged,

which is computed as the ratio of layoffs to the total employment. (Dong, 2012)
2.2 Theories
There are many theories related to labor market. However, in this study just
analyzes labor market theory to estimate reasons of labor retrenchment. More
specifically, based on labor market theory, it is straightforward to find determinants
impacting on labor demand and labor retrenchment. The small part in this section
presents empirical studies related to determinants of labor demand.
Human capital
Human capital is designated as the flow of productive services provided by a
worker. (Fine, 1998) It is accumulated through education, training, work experience

4


and how it is used and rewarded. Investing in human capital plays a crucial role in
development strategies in enterprises. The many ways to invest include schooling,
on- the- job training, medical care, vitamin consumption, and acquiring information
about the economic system. (Becker, 1962) Furthermore, according to Becker
(1993), he defined human capital as people’s knowledge and abilities, which can be
achieved by education and trainings. More investment in human capital may make
more profit. In other words, investment in human capital improves the labor
productivity. The question of whether investment in human capital is related to
labor retrenchment is considered in this study.
Labor demand
According to theory in microeconomics, the production function in a firm is
presented as following:
Q = f(L, ͞K)
Where Q is the output, L and K are labor inputs and capital, respectively. Capital is
fixed in the short-run and not fixed in the long-run. The profit in this case is as
follows:

π = pQ - wL - r ͞K
Where p, w and r are price of output, the exogenous prices of labor and capital
services, respectively. The employer is trying to maximize profit. The wage is just
only cost of labor to the employer. The labor market is competitive.
Based on other theories, in the long-run, the labor demand depends on some
determinants such as output, capital, and technology. (Brechling, 1965) The firm’s
demand function of labor services can be written as following:
Es = f(Q, K, T)
Where:
Es stands for labor services.

5


Q stands for output.
K is the stock of capital.
T is the state of technology.
In general, the expectation is that the partial derivatives of this function to have the
followings signs:
∂Es

> 0,

∂Q

∂Es

< 0 and

∂K

∂Es

< 0.

∂T

It means that labor demand and output in the firm are positive relationship, labor
demand and the stock of capital is the negative relationship, labor demand and the
state of technology is the negative correlation.
According to theory relating to the demand for labor in the long-run of Hamermesh
(1986), the theoretical discussion is divided into two parts: part one presents
demand for labor in the two-factor case, part two shows in multi-factor case.
Assuming that production exhibits constant’s returns to scale, as described by F, as
following:
Y = F (L, K),

Fi >0,

Fii <0,

Fij >0

(1)

Where Y is output, L is labor inputs and K is a capital. A firm that maximizes profit
subject to a limit on cost will set the marginal value product of each factor equal to
each price.
FL – λw = 0

(2a)

FK – λr = 0

(2b)

w and r are the exogenous price of labor and capital services, respectively. In this
case, λ is a Lagrangean multiplier presenting the extra profit generated by relaxing

6


the cost constraint. Assuming that price of output is unity. The enterprise will
operate under cost constraint:
C0 – wL – rK = 0

(2c)

The ratio of equation (2a) and (2b) is familiar statement that the marginal rate of
technical substitution equals the factor – price ratio for a profit-maximizing
enterprise. [Hamermesh (1986), pp. 431]
According to Allen (1938), the elasticity of substitution between the services of
capital and labor as the impact of a change in relative factor prices on relative inputs
of two factors. In this case, holding output is constant. Alternatively, it is the effect
of change in the marginal rate of technical substitution on the ratio of input factors,
being defined as an elasticity. In terms of the two-factor linear homogeneous cases,
it is as following:

d ln(K/L)
σ=

d ln(K/L)
=

d ln(w/r)

FLFK
=

d ln(FL/FK)

(3)
Y FLK

(Source: Allen (1938), pp. 342-343)
The own-wage elasticity of labor demand at a constant output and r is as follows:
ηLL = - [1-s] σ <0

(4a)

in where, s = wL/Y, meaning that the share of labor in total revenue.
The cross-elasticity of demand for capital services is as follows:
ηLK = [1-s] σ > 0

(4b)

Both equation (4a) and (4b) reflect just only substitution along an isoquant. When
wage rate increases, the cost of producing given output rises; and the product price
will increase. The result is that reducing the quantity of output sold. And the share

7


of labor in total cost, and the absolute value of the elasticity of product demand
effect on scale. These results are the most crucial in the theory of labor demand.
(Hamermesh, 1986)
Determinants of labor demand
According to empirical studies, the basic determinants of slope of labor demand
include the diminishing marginal product of labor, changing in elasticity of product
demand as output varies, and complementarities across firms and industries.
(Robert, 1991)
Based on the empirical study of Bernal (2003), this paper is related to
“determinants of labor demand in Colombia.” The main results of the paper are as
following. First, labor demand elasticities in Colombia are around negative zero
point five, which is not low2 by the international standards. Second, the wage
elasticity of labor demand increases (in absolute terms) during contractions. Hence,
the increase in prices and the beginning of a recession period had a significant
impact on employment. Finally, the adjustment costs of changing labor as well as
wage elasticities were not affected by changes in the regulation relating to
severance payments and dismissal costs. In summary, wage rate is one of the most
crucial factors of labor demand.
Besides wage rate, there are some factors impacting on labor demand. According to
Dong & Xu (2009), this paper presents the determinants and patterns of the labor
restructuring process in China, using firm-level panel data. Data is collected from
the urban enterprises annual survey from 1986 to 1990. The main results show that
the employment adjustment and downsizing process has been driven significantly
by market force. Authors found a resemblance in the patterns of firm response to
demand shocks across the public and private sectors. Another result is that
employment changes are positive correlations with sales revenue. It is the negative

2

(in absolute terms) Assuming that all increase in taxes and contributions implied an increase in labor cost.

8


correlations with wage, number of competitors and firm tax rate. Interestingly, there
is the negative correlation between firm size and firm age with employment
expansion.
Conclusion, determinants of labor demand from empirical studies are sales revenue,
wage rate and market power. Undeniably, determinants of labor demand in firm and
causes of labor retrenchment in a firm are similar. Therefore, empirical studies
related to determinants of labor demand play a key role to estimate factors
impacting on labor retrenchment in enterprises.
2.3 Empirical studies on determinants of labor retrenchment
Labor retrenchment theories used empirical studies are crucial to estimate causes of
labor retrenchment in enterprises. There is a large volume of published studies
describing why firms retrench labor. This part presents empirical studies3 on
determinants of labor retrenchment.
2.3.1 Empirical studies before 2000 year
First, studies are related to labor retrenchment and firm performances. According to
these empirical studies, layoffs are more when enterprises perform poorly. (Kang,
1997)4 So there is the correlation between firm performance and labor laid off,
meaning that enterprise performance and labor retrenchment are correlation. (Kang,
1997) This theory used to estimate the relationship between labor retrenchment and
firm performances in the long-run. According to Fay & Medoff (1985), there is the
correlation between labor and output in the short-run. Therefore, this study will
estimate the relationship between labor reduction and output in a firm to answer the
question of whether there is the existence of this correlation.

3

Table 1 in appendix shows the summary of empirical studies including the name of working paper,

established year, name of authors, data and methodology, and the main findings.
4

In empirical study of Kang (1997), firm performances are mesured by return.

9


Second, theory is related to technological innovation and labor reduction.
According to Barron (1987), manager will consider rate of labor hired, and rate of
capital investment to maximize profit and minimize product costs. It means that if a
firm invests more cost in technological innovation, it will ponder on the number of
labor hired. Therefore, labor hired and technological innovation costs are
correlation.
Third, historian has argued that firm performances, firms downsize their operation
by closing plans, selling asset, reducing capital expenditures, and employee layoffs.
(Kang, 1997) Based on regression results, one of the main results is that the
probability of layoffs is positive related to the equity ownership by the firm’s main
bank. It means that probability of layoffs and equity ownership is correlation. In
other words, there is the relationship between labor retrenchment and total asset of a
firm.
Next, theory is referred to debt and labor retrenchment in firms. According to
Hanka (1998), the result from his research is that the high debt to a firm is
associated with employment reduction. That is the reason why this study will
estimate the relationship between debt and labor retrenchment in micro, small, and

medium enterprises.
Another point which should be mentioned is that theory referring to training cost
and labor retrenchment. The most economic theorists have emphasized the role of
education, and technological development to improve productivity. (Nelson, 1966)
Undeniably, labor with higher skill will work more effectively. However,
employers must select a rate of hire, a training program for both existing labor and
new labor, a compensation package and rate of capital to invest and minimizing a
production cost. (Barron et al, 1987) Therefore, managers will consider rate of labor
hired; labor fired and training cost to reduce total input costs and to improve
productivity. In other words, there is the relationship between labor retrenchment,
labor hired and training costs.

10


The firm behavior theory in which enterprises select a hiring standard to maximize
profits is considered. There is a correlation between firm size, wages and
employment hiring standard. (Weiss & Landau, 1984) More specifically, firms
select a wage and hiring criterion to satisfy demand for labor at the minimum cost.
And firm size and wages are positive correlation. (Weiss & Landau, 1984) When
more people hired, more wages will be paid out. (Sen, 1999) Therefore, if wage rate
is increased, the number of people hired may reduce. In other words, there is the
striking point is the existence relationship between wages and number of labor
hired.5 Therefore, there is the relationship between wages and labor retrenchment in
enterprises.
2.3.2 Empirical studies after 2000 year
According to Appleton (2002), empirical study relating to causes of labor
retrenchment. The main aim of this paper is to estimate labor retrenchment issue in
China. This paper examines the individual-level determinants and consequences of
the xi-a-gang policy, using a survey conducted in the year 2000 and semiparametric model; testing omitted heterogeneity. After estimating, determinants

affect on labor retrenchment rate such as education, working skill, age, productivity,
and training cost. The findings are that the risk of retrenchment was higher for
women, the less educated, the low skilled, the middle-aged, and those employed by
local government or urban collectives. Moreover, the individual received training
from enterprise to enhance a skill would be lower risk of retrenchment than others.
According to Hu (2004), this study estimated reasons of labor retrenchment in firmlevel covering 323 state-owned enterprises in China in the late 1990s. The model is
as follows:
Yit = β0 + βXit + γPit+ δControlit + ηSector + θYear + εit

5

The relationship between firm size and hiring standard is complicate. Weiss and Landau did not attempt to
analyze the relationship between firm size and the average ability of the firm’s work force. (Weiss&Landau,
1984)

11


In model, dependent variable is labor retrenchment rate (Y), and independent
variables are political-economic factors (P):

government’s fiscal position;

variable’s business relating to factors (X): competition and enterprise performance
measured by sales revenue and profit; and control variables (Control) including
SOEs size, SOEs age and industrial dummy’s variables.
Based on regression results, there are some main findings. In terms of enterprise
performance, enterprise performance is significant and negative correlation with the
degree of labor retrenchment. However, a reduction in an enterprise’s excessive
labor is unlikely to impact its capacity and sales revenue. In terms of competition,

market competition becomes an effective disciplinary force for managers of SOEs
in China. In terms of government’s financial position, labor retrenchment in SOEs
is related to government’s fiscal position. Finally, in terms of some control variables
such as firm age and firm size, age is positive relationship with labor retrenchment
in SOEs. The reason is that older SOEs tend to have been higher level of
organization inertia. Size is a positive effect on labor retrenchment in SOEs, since
large firms have more redundant labor than smaller firms. Conclusion, determinants
impacting on labor retrenchment in SOEs include enterprise performance, market
competition, government’s fiscal position, firm age and firm size.
According to Dong & Xu (2009), this paper presents the determinants and patterns
through a labor restructuring process in China, using firm-level panel data. Data is
collected from the urban enterprises annual survey from 1986 to 1990. The main
results are that the employment adjustment and downsizing process has been driven
significantly by market force, the patterns of firm response to demand shocks across
the public and private sectors. Another result is that employment changes are
positive correlations with sales revenue, being negative correlation with wage,
number of competitors and firm tax rate. Interestingly, correlation between firm size
and firm age with employment expansion is negative. Since determinants of labor
demand in this paper are the same determinants of labor retrenchment in the

12


conceptual framework, therefore, this paper is one of the important empirical
studies.
According to Dong (2012), this paper estimated the causes of labor retrenchment
and presented that there are differences in male and female labor retrenchment in
enterprises. Data is firm – level, including 683 state-owned enterprises for the
period from 1995 to 2001. Focusing on the regression model to estimate
determinants of labor retrenchment, dependent variable is labor discharge rate,

independent variables are a growth rate (Y); wage rate (W); time trend (T); X is
covariate control variable: size of firm, age of firm, state ownership, temporary
labor…; (n) is the specific fixed effects of firms; (ε) is an error term.
dcrate it = β0 + β1Yit -1 + β2Tt + β3Wit – 1 + β4Xit + ni + εit
In determinations of labor discharged rate regression, the results found that labor
discharged rates would be lower for higher growth enterprises. Second, labor
discharged rates would be higher for enterprises that experienced higher wage
growth. Third, older firms which tend to have greater labor redundancy may have
higher discharged rates. Next, the retrenchment rate may also differ by size of an
enterprise, meaning that smaller enterprises may be higher rate of labor discharged
than larger ones. Moreover, the share of state ownership is lower, the incentive for
enterprise to lay off labor is greater. Lastly, SOEs with a larger proportion of
temporary workers had higher latitude to adjust the workforce to markets
institution, and consequently, would have higher the degree of labor discharged.
Conclusion, according to empirical studies, factors impacting on labor retrenchment
in SOEs include revenue, profit, wage rate, firm size, firm age and the ratio of
temporary labor in a firm. As an illustration in Figure 2.16, it summarizes
determinants of labor retrenchment in empirical studies.

6

Figure 2.1 is presented in the next page

13


2.4 Summary
There are many causes of labor retrenchment in enterprises. There are elements of
enterprise performances measured by output or profit, elements of technological
innovation measured new equipment cost, technological research and development

cost, and other factors such as labor force or firm size, age firm, firm’s debt,
training cost to labor, and assets. According to empirical studies, this study will
eliminate which reasons of labor retrenchment in enterprises.

14


Enterprise
performance (output,
revenue)

(Kang, 1997) (Fay & Medoff, 1985)
(Hu, 2004) (Dong, 2012)

Training cost

(Barron et al, 1987)

(Weiss & Landau, 1984)
Wage

(Sen, 1999); (Dong, 2012)
(Hanka, 1998)
Debt

Technological
development

(Barron et al, 1987)

Labor
retrenchment
in enterprises

(Kang, 1997)
Equity ownership

(Hu, 2004)
Firm age

(Dong, 2012)
(Hu, 2004)
Firm size

(Dong, 2012)
(Hu, 2004)
Competition

(Source: Author)

Figure 2.1 Determinants of labor retrenchment in empirical studies

15


3.

RESEARCH METHODOLOGY
3.1 Data
3.1.1 Data sources and sample size

The data collected from Small and Medium Enterprises (SMEs) data in Viet Nam in
2009. In terms of enterprises, it covers 1465 firms, in terms of observations, there
are 1465 observations. The sample enterprises are randomly drawn in ten cities and
provinces in 2009. A summary of enterprise distribution across cities is illustrated
in the below Table 3.1.
Table 3.1: Sample distribution
Cities and provinces

Observations

Ha Noi city

215

Ho Chi Minh city

200

Hai Phong city

122

Ha Tay province

241

Phu Tho province

159

Nghe An province

236

Quang Nam province

94

Khanh Hoa province

64

Lam Dong province

30

Long An province

104

Total

1465

16


(Source: Author)
Table 3.1 provides a description of the different observations in provinces and

cities. As can be seen from this table, the number of observations is the highest in
Ha Tay province and is the lowest in Lam Dong province.
3.1.2 Variables
Dependent variable is the degree of labor retrenchment (percent). The labor
retrenchment as a direct measurement tackles the surplus labor issue in enterprises.
In this study, labor retrenchment variable is defined as the ratio of labor reduction to
the total labor force in the survey period.
Based on literature reviews and the justification, independent variables are
presented as following:
o Enterprise performance measured by the alternative variable is total
output, training cost for labor, wage rate and firm’s debt.
o Technological innovation measured by technology equipment
investment.
o Other variables are firm age, firm size, and competition.
3.2 Research methodology
3.2.1 Conceptual framework
Before coming to hypotheses in the study, the first thing which should be mentioned
is a conceptual framework, concluding from empirical studies. Based on that
framework, it is straightforward to propose the expectation on hypotheses. Figure
3.1 illustrates the conceptual framework.

17


Output (H1.1)

Training cost (H1.2)

Enterprise
performance

(H1)
Wage rate (H1.3)

Technology equipment
investment (H2.1)

Debt (H1.4)

Labor
retrenchment

Firm age (H3.1)

Other factors
(H3)

Firm size (H3.2)

Competition (H3.3)

(Source: Author)

Author)

Figure 3.1 Conceptual framework

18

Technological
innovation

(H2)


According to the conceptual framework and empirical studies, the presentation of
how dependent and independent variables selected and the expected relationships
between variables are as following.
Undeniably, there are many factors impacting on labor retrenchment in enterprises.
It is worth stating from the outset that the labor input of enterprise is considered
based on a production function, price of input, and expected sales. (Wong et al,
2004) Therefore, many people assume that labor retrenchment function is related to
business factors. Furthermore, when it comes to the business factors, empirical
studies show that downsizing of a labor force is one of the most steps to adjust
strategies following enterprise’s performance decline. (Denis and Kruse, 2000) and
(Kang and Shivdasani, 1997) Moreover, there is the relationship between the degree
of labor retrenchment and output. (Dong, 2012) In other words, employment
cutbacks may be expected to increase enterprise productivity by eliminating
redundant labor. (Dong, 2005) One of the main results of empirical papers presents
that labor retrenchment degree would be lower for higher growth enterprises.
Therefore, the expectation is that there is a correlation between labor retrenchment
and total output in a firm.
H1.1: There is the negative relationship between output and the degree of labor
retrenchment.
Interestingly, based on the previous studies relating to determinants of labor
discharged rate, there is the relationship between labor retrenchment degree and
training labor. If firms give more training cost to employee, firms would less lay off
those employees. Undeniably, training cost to upgrade labor skill is high. Labor
productivity may be improved after training course. So there is a relationship
between training labor and labor retrenchment. (Appleton et al, 2002). Firms will
retrench a few labors after upgrading labor skill or spending training cost for
employees. Therefore, training cost and labor retrenchment is negative correlation.

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