Unemployment is the biggest obstacle for Brazil's economy
unemployment brazil crisis

Unemployment is the biggest obstacle for Brazil’s economy

Eduardo Intrieri had been looking for a job for almost two years, as The Brazilian Report revealed in the first part of this story. The efforts of the 25-year-old Brazilian engineer finally paid off in June 2017. A call for an interview at a company in a neighboring city was his big shot. When he sat for a talk with the Human Resources director, however, Eduardo thought there was a misunderstanding. The company was seeking an intern – or at least someone willing to take an intern’s pay.

“I was shocked,” he remembers. “It was confusing, but I had to make a decision right there.” He ended up following the HR professional’s advice. In the application form, when faced with the “salary expectation” field, he wrote down what the company was prone to pay: BRL 1,300 (USD 390) per month. “I thought at some point they would realize I had finished college and pay me more,” he concedes. That never happened.

The sum agreed on the contract is six and a half times lower than the base pay for engineers in Brazil. As a contractor, he is also not entitled to paid leave, pension savings or any labor rights usually held by a regularly hired employee. On his way back home, Eduardo did not feel like celebrating. “As no opportunity had popped up for so long, I had to accept those terms. I needed to. There’s no better way to put it,” he says.

As he was by no means the only graduate struggling to find work, Eduardo Intrieri is not alone. Unemployment is still high, and while it fell slightly in 2017 it is not necessarily good news. The reason behind this trend is a sharp increase in low-quality positions. When investments are low, and companies don’t hire, people find a way to work somehow – but they make little money.

Such situations become so ordinary that those working on their own or with no formal contract have outnumbered regularly-employed workers. The number of Brazilians properly hired – and entitled to labor rights – keeps falling despite the end of the recession. The figure reached a record low of 32.9 million in the quarter finished in March 2018, the most recent data reveals.

Meanwhile, self or underemployed workers sum 33.6 million people. On top of that, another 13.7 million Brazilians are unemployed. Both groups account for 45 percent of the country’s labor force. These figures are especially important to understand the recovery potential of Brazil’s economy because, aside from investments and government expenditure, families’ consumption is another factor that could generate demand, boost production and put the country back on track for growth. But with almost half of the working-age population making less or no money at all, there is no reason to count on families’ consumption as a decisive drive for the awaited upturn.

To put into perspective how the decaying labor market risks undermining this process, it is necessary to understand how such dynamics impact people’s wages and the amount of money in circulation.

For starters, the most recent data shows that the sum of wages earned by all Brazilians employed under the country’s labor legislation (CLT) declined 9.3 percent between its historical peak, in July 2014, and October 2017. This means that each month R$ 10.5 billion (US$ 3.1 billion) is no longer being injected into the economy, according to a monthly data gathering by Fipe, the Institute of Economic Research Foundation, which is linked to the University of São Paulo.

However, unemployment is not the only way a weak labor market affects the potential for economic recovery. Poorer employment conditions also play a role. On average, an employee with no formal contract earns 40 percent less than a worker regularly hired under the CLT legislation. Those working on their own earn 23 percent less, according to IBGE figures compiled by The Brazilian Report.

It is true that some macroeconomic conditions could favor Brazilian’s purchase power. For instance, Selic, the basic interest rate, is at an all-time low of 6.5 percent per year. Additionally, at 2.68 percent in March, inflation hit its minimum in 12 months since the Real was first implemented in 1994.

Despite that, the positive effects of these figures have yet to reach consumers and businesses. Contrary to the 12th-consecutive reduction of the Selic in March, the average interest rate charged by banks to lend money to customers and companies ended the first quarter of 2018 at 41.4 percent, higher than the 40.3 percent registered in December 2017.

Regarding inflation, it makes little difference if prices are rising at a lower pace when families’ income is shrinking and borrowing money has not become easier. At a conference in Rio de Janeiro, Insper’s president and economist Marcos Lisboa said that the credit market has not recovered from the recession and will not go back to what it was years ago, according to a report by O Estado de S.Paulo.

The truth is that even if economic activity is rehearsing a comeback in the short-term, labor market conditions will remain sour for a longer period. “When a recession starts, the working conditions are the last aspect of the economy to be affected. However, when the economy grows back again, they are the last to rebound,” explains professor Hélio Zylberstajn, the researcher coordinator at Fipe who has been studying Brazil’s labor market for decades. “Due to their high cost, hiring and firing are considered last-resort measures for employers in Brazil,” he adds.

This should serve as a warning: better-quality, higher-paying jobs are vanishing while precarious low-paying positions are on the rise. Both mean less income for workers and are not likely to change any time soon. Tighter budgets in their turn indicate a lower level of household expenditure. Little consumption inhibits production. All these are significant obstacles to economic revival.

Asked if such a challenging situation has been seen elsewhere, Professor Zylberstajn cautiously makes a comparison: Greece. “Brazil’s fiscal situation is terrible, and as the political knot does not allow it to be solved, via the pension reform, we are approaching a dangerous point of making the whole situation unworkable,” he told The Brazilian Report.

In this worst-case scenario, the recession that just ended would become just the beginning of a deeper downturn that could last for years.

As Eduardo puts it, the longer his career crisis lasts and the more he falls behind his competitors, the harder it is to achieve his goals. The same goes for Brazil. The longer the country takes to define its political future, establish a transparent business environment, and balance its public accounts so that government and foreign investors can return, the weaker and slower the upturn will be.

Despite overcoming its worst crisis in 30 years, Brazil has no guarantees that the page has been turned and that economic growth waits around the corner. If anything is certain, it is that the economic recovery is not a sure thing.

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MoneyMay 08, 2018

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BY Mario Braga

Braga is a journalist from São Paulo. He is an Erasmus Mundus Journalism scholar pursuing his Master’s degree at Aarhus University (Denmark) and at the London’s City University.