Brazil: We Want to Work

Although the fiscal crisis is a major cause of Brazil’s recession, by generating higher inflation and feeding fears of a debt default, distortions of the economic system, such as the malfunctioning labor market, greatly aggravated the economic crisis. This is precisely what affects peoples’ lives the most, and can hamper the pace of economic recovery and define the political scenario in 2018.

Adjustment of the labor market is inevitable in face of a weak economy and a challenging financial landscape for companies, making them even more sensitive to the economic climate. The more this adjustment involves lower real wages, the fewer workers should be laid off.

However, this has yet to occur, as pointed out by Naércio Menezes Filho in a study comparing this crisis with that of 1996-2003. The average real wage (discounted for inflation) in the present episode has fallen less (only 2% in the two years since the start of the crisis), and the unemployment rate has risen more.

In 2015-16, the salary adjustment of unionized categories was between 9%-9.5% (median) a year, according to Fipe, against average inflation of 8.9% a year, meaning a marginal real gain, despite the rising unemployment.

Besides this, since inflation in 2015 was partially contaminated by the one-time shock from the hike in electricity rates, it would be advisable not to pass inflation fully through to wages. This would be an unbearable cost to the productive sector, especially with the decline of firms’ productivity. The best policy would be for wage increases to be based on future inflation expectation, to avoid indexation of salaries.

Although union representatives may have been well-intentioned, the pressure in the wage bargaining, including for gains greater than past inflation, has aggravated the crisis and unemployment, and helped make inflation even more pervasive.

If there had been more flexibility in the negotiations over wages and working hours between employees and employers, the net layoffs would likely have been much less severe than the 3 million lost jobs in the formal sector since 2015, an unprecedented number. The result would have been better for the welfare of society as a whole, contributing to faster economic recovery.

It is natural for the government to regulate labor relations. But in Brazil this goes too far, judging from the 9 million labor lawsuits pending a court ruling. The country even stands apart from countries with a stronger tradition of regulating the labor market, such as most European countries.

The rules of the Labor Code (CLT – Consolidation of Labor Laws), the Constitution and statements of consolidated position (súmulas) from the Superior Labor Tribunal (the highest labor court) generate huge complexity and legal insecurity in this market. By overprotecting workers, these rules wind up harming the working class, by raising the risk of layoffs during a crisis and reducing the space for hiring in a recovery.

Two pieces of good news bode well for recovery of the economy.

First, the country has learned its lessons from past crises. Congress just approved one of the two proposals for reform of the labor market that were under debate, the one on outsourcing. The other is known as the “concordat on legislation.” There has been a shift in philosophy toward greater flexibility and security in labor relations. These are measures that can help revive hiring.

The other good news is that the labor market now shows signs of stabilizing, despite the fragility of the productive sector, which still indicates a need for further downsizing. The recent results suggest that employers are more confident in the economic adjustment.

The job market will be a key issue in the 2018 election, as well as for continuation of the reforms agenda. Most people underestimate the importance of the reforms for economic growth.

As pointed out by Lourdes Sola, the economic debate is something remote to most citizens. It will thus be crucial for society to perceive that the changes in economic policy are worthwhile, which can be achieved by increasing employment.

Only time will tell if the rebound of employment will come soon enough and be strong enough to steer clear of unpleasant surprises in the election campaign in 2018.

Brazil Macro Policy & Government

Zeina Latif is chief economist at XP Investments. She holds master and doctorate degrees in Economics at University of Sao Paulo (USP).

Previously she worked at Royal Bank of Scotland as senior economist for Latin America, and ING, ABN Amro and HSBC Asset as chief economist for Brazil.

She is columnist at the newspaper Estado de São Paulo and she is counselor at the Social and Economic Development Council of the Republic Presidency.

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