The Role of Informal Labour in Vietnam's Economic Growth

Abstract

Background: Informal labour is an inseparable part of the economy, particularly in developing countries such as Vietnam. This sector comprises a significant portion of the workforce and plays a crucial role in job creation, income generation, and maintaining social stability. Despite its perceived inefficiencies, the informal sector makes a significant contribution to sustaining aggregate demand and economic resilience, particularly during economic downturns.

Objective: This article analyses the impact of informal labour on Vietnam’s economic growth using empirical data.

Methodology: The study employs panel data collected by province from the General Statistics Office of Vietnam for the period 2018–2022. It utilises the System Generalised Method of Moments (S-GMM) to address endogeneity and assess the influence of informal labour, alongside capital, income, and demographic variables, on regional economic growth (GRDP).

Results: The findings indicate that informal labour has a positive and statistically significant impact on economic growth in Vietnam. In particular, increases in average income and informal employment are closely associated with higher GRDP. The study also reveals that population growth may have adverse effects if not accompanied by improvements in education and infrastructure.

Conclusion: The empirical evidence confirms the informal labour sector's supportive, statistically significant role in driving economic growth in Vietnam. The strong positive association between increases in average income and informal employment with Gross Regional Domestic Product (GRDP) highlights the sector's crucial function in stabilising labour markets and sustaining domestic consumption.

Unique Contribution: This study provides robust empirical evidence on the role of informal labour in economic growth using the S-GMM methodology. It highlights the dynamic interaction between informal employment and macro-economic performance, reinforcing the argument that informal sectors, while often undervalued, are vital to the functioning and resilience of developing economies like Vietnam.

Key Recommendation: Government authorities should formally recognise the informal sector in national development strategies. Specific policy measures—such as flexible social-protection schemes, access to microcredit, vocational training, and representation in policymaking—need to be adopted to strengthen productivity, resilience, and the integration of informal labour into the formal economy.