Lao PDR has seen strong economic growth during the past decade with an average
growth rate of 7.8 percent per annum. Much of this has been driven by the growing external
appetite for Lao PDR’s natural resources, which have not generated broad-based job creation and
income growth for a significant proportion of the Lao population. Manufacturing – and
especially garment manufacturing – has the potential to generate jobs for the large unskilled
segment of the Lao labor force. The garment sector did indeed provide substantial job creation in
the 1990s, especially for women, but more recent trends suggest a relative contraction of the
manufacturing sector since 2007/08, both in terms of employment and weaker wage growth. This
contraction is mirrored in Lao PDR’s manufacturing trade outcomes over the past decade,
pointing to a decline in competitiveness on the international stage. While exports can be an
avenue to growth and job creation, the success of policies aiming to sustainably improve
employment outcomes will depend on the realities of Lao export competitiveness and global
market demand.
2. Based on a series of complementary methodological approaches and datasets implicitly
linking trade to jobs, this report paints a mixed picture of Lao PDR’s recent export
performance and how this has translated into job creation and improved job quality across
the economy. The findings of these various analytical approaches provide insight into the
potential drivers of Lao PDR’s labor outcomes including the role of exports, and what the
Government and firms can do to better position Lao producers in external markets so that more
and better jobs are created for Lao workers in the future.
3. Whereas the economy is undergoing some structural transformation away from
agriculture, workers are primarily shifting into low-skill non-tradable service activities and there
is no strong concurrent rural-to-urban shift. Agricultural employment continues to dominate the
Lao labor market, but agricultural production accounts for only a small share of Lao exports. The
most dynamic export sectors – mineral products, base metals, and wood and pulp – are not
generating sufficient labor demand to absorb the large unskilled segment of the labor force.
Mining wages are higher than other sectors, controlling for other factors, but mining activities
are not labor-intensive. Even the garment sector, which accounts for a tenth of exports, employs
less than 2 percent of the labor force, pays very low wages, and experienced slower real wage
growth than the rest of the economy (except for hotels and restaurants).
4. Manufacturing in Lao PDR is more export-oriented than average compared to other
countries, with export rates similar to Vietnam. Exporting firms tend to be larger than nonexporting
firms, both in Lao PDR and elsewhere. However, comparing Lao PDR’s 2012 export
basket to countries at a similar level of development, Lao exports tend to be less sophisticated
than those from Senegal, Cambodia, Indonesia, Bangladesh and the Philippines, based on
indirect (global trade-weighted average) measures of wage, value-added, and human and
physical capital. In the case of garments, which have a high labor content, Lao garment exports
may in fact be less competitive due to higher wages vis-à-vis Bangladesh and Cambodia. Lao
PDR’s small scale of garment production also makes it less well placed to compete for large
contracts in certain markets compared to Cambodia and Bangladesh, even if Lao producers have
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found a competitive niche in European markets. In dynamic terms, the labor sophistication of
Lao PDR’s export basket has remained relatively flat since 2006, and made little progress in
closing the competitiveness gap vis-à-vis comparator countries. This suggests relatively low-tech
production methods and/or weak education outcomes. These factors in turn limit exporters’
capacity or incentives to invest in more productive technologies.
5. A key obstacle to attracting investment in high-value manufacturing is the Lao labor
force’s low schooling levels. With respect to wages, the Lao labor market rewards higher
education levels with higher wages, although we find evidence of declining returns to each level
of education between 2007/08 and 2012/13. For those with a tertiary degree, for example, the
premium relative to less than primary fell from 58 percent in 2007/08 to 39 percent in 2012/13,
suggesting that there is increasing supply of skilled labor to meet current demand (this may be
partly driven by civil service wage distortions). This also translates into relatively lower
incentives for workers to achieve higher education levels. This trend contrasts with other
dynamic economies where the diversification into higher value products and the adoption of new
technologies require more and more top skills and therefore generate increasing returns to the
highest levels of education.
6. It is notable that in the garment sector in particular, wage growth for those with a
vocational degree was much faster than the average for all garment workers (14 percent vs. 2.6
percent annual growth). Whereas this implies increasing returns to semi-skilled workers,
consistent with reported shortages of skilled labor, the slower wage growth for unskilled or
entry-level garment workers may explain why employers have difficulty retaining workers
(factories report high turnover rates of new entrants, most of whom lack a secondary or
vocational degree). This either means that employers are actually willing to incur the repeated
recruitment and training costs of their rapidly changing unskilled labor force, or that profit
margins are too small to accommodate higher wages for this majority segment of the garment
sector workforce.
7. Data on worker movements between jobs and into and out of different sectors suggest
that the Lao labor market is relatively fluid, but workers seeking better work opportunities in
other sectors typically face significant costs to transition. High labor mobility costs are the norm
for countries with a large share of primary employment, and Lao PDR is no exception. Skilled
workers face relatively lower mobility costs than unskilled workers, while female workers face
higher transition costs compared to men. The agriculture sector has the lowest entry costs, and as
such acts as the “sector of last resort”.
Policy Recommendations
8. Policies to facilitate better labor outcomes could focus on improving existing firms’
or producers’ competitiveness, helping firms to enter and/or grow, facilitating access to
technology and higher value production, and enhancing the skills in the labor market to
attract and induce higher-value activities.
9. Small profit margins in the low-value garments sector mean that Lao producers have little
room for finding productivity gains vis-à-vis competitors such as Bangladesh and Cambodia. A
more promising strategy would focus on creating more attractive niches or product lines for high
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income economies through e.g., upgrading labor standards and environmental standards, thus
helping big brand retailers and buyers to meet their corporate social responsibility objectives.
10. High turnover and exit rates from garment factories back to farm work or migration
results in productivity and production losses for the Lao economy. Policies to reshape the
incentive structure of garment jobs (such as working conditions and/or career development)
could entice workers to remain in relatively more productive work.
11. A large pool of skilled and competitive labor is an essential component both for attracting
investment in higher-value activities, and for enabling firms to upgrade the quality of their
output. This means policies to increase educational attainment, more support for basic education,
curricula reform to meet market demand including soft skills and entrepreneurial skills, and
aligning vocational training to private sector demand.
12. Exporting rather than selling to the domestic market is correlated with more skilled and
unskilled employment, although the effect is quite small. Policies that help producers access new
external markets could include joining (electronic) knowledge platforms, improving standards
compliance and certification in line with international standards, reducing trading costs by
improving trade logistics and trade facilitation systems, and providing enterprises with support
for marketing assistance and training, for example.
13. Whereas labor regulations do not seem to be a binding constraint on hiring, there is
anecdotal evidence of confusion surrounding the implementation of the new minimum wage
regulation which could diminish labor demand, suggesting a need for clarification and outreach
by the Ministry of Labor. In addition, other recent World Bank reports1 identify critical business
climate challenges that present larger impediments for firms trying to export, and that should be
addressed.
14. Lao’s relatively low-tech export basket limits its capacity to access higher income
consumers seeking higher quality goods and services. Policies should therefore focus on
facilitating access to technology and higher value production through for example more
favorable (but still non-distortionary) investment incentives, or more generally by easing access
to formal finance through banks or SME-targeted credit institutions.
15. The high labor mobility costs in Lao PDR prevent efficient labor allocation across
sectors, and could generate significant welfare losses in the event of a sudden change in the
economic environment by slowing and dampening the labor market response. Policies to
facilitate labor mobility could include labor market information or matching services, or costshare
training that is demand-driven and targeted to specific private sector needs.
16. Diversifying production and employment away from the primary sector toward industry
and services will also reduce labor mobility costs, enabling workers to transition more easily to
better jobs. In addition to policies directly targeting lower mobility costs, there is scope for
reforming distortionary public employment hiring, compensation and human resource
management policies, and revisiting the role of SOEs. Reducing these distortions could curtail
queuing for public sector jobs and free more educated workers to enter the private sector.

1
See World Bank 2011b, World Bank 2014a, World Bank 2014b, World Bank 2015
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17. The limitations of Lao PDR’s manufacturing sector – both in size and quality – mean that
any positive policy impacts are likely to have only modest effects on aggregate welfare and
inclusive growth. Policies will need to go beyond the manufacturing sector to address the limited
employment and demand spillovers of mining production, and the limited market integration and
value addition in agricultural production. Policies to enhance agricultural productivity, job
quality and economic opportunities in rural areas will not only foster greater equity, but will also
reduce urban-rural distortions and dampen the incentives to migrate