Opinion – Samuel Pessôa: Full employment in the 2000s?

Two weeks ago I reacted in this space to the article by André Singer and Fernando Rugitsky. I argued that the economy operated at full employment in the 2000s. I used information from the IFI (Independent Fiscal Institution of the Senate), that the gap in resources in the period was positive. Positive resource gap is what macroeconomists call the state of the economy when it operates beyond full capacity.

So I disagreed with their claim in the original article that the IFI study showed that fiscal policy had contributed to raising the growth rate. The IFI study only showed that there was positive fiscal momentum.

According to the authors, “it happens that the identification of an economy’s growth capacity or, to use the technical term, of its potential output, is known to be controversial. More: in the specific case, the labor market data do not support the idea of that the economy was at ‘full employment’, especially at the beginning of the period mentioned by the columnist”.

Although the IFI data indicate a positive gap —just look at graph 2 of the study cited in the response to me—, the authors point out that there was idleness in the labor market. I have a hard time keeping up with them. If the IFI gap was positive, how could there be idle work?

The figure below shows my colleague Ibre Bráulio Borges’ calculations of the unemployment rate that keeps wages growing at the same pace as labor productivity. This is the natural rate of unemployment, or the rate of unemployment that does not accelerate inflation. As the name suggests, if the unemployment rate is lower than the natural rate, inflation will permanently accelerate.

The data are very clear: between the first quarter of 2004 and the second of 2015, the observed unemployment rate was below the natural rate. That is why, over this period, inflation accelerated, net exports worsened, wages rose beyond productivity, and the return on investment declined.

The reader may be surprised that the natural rate was so high in the period. The natural rate of unemployment is given by the operating rules of the economy, that is, by the legal and institutional framework.

There is evidence that, with the labor reform, the natural rate is falling in Brazil. Additionally, recent very positive data on the performance of the labor market, with strong generation of jobs, including formal ones, suggest that there must have been a structural break in the functioning of the labor market.

​Only microeconomic reforms and improving the quality of the public education system will be able to reduce the natural rate of unemployment.