Dictatorship tried to deindex salary, as Guedes wants, but failed

Politically unsustainable, even in a Brazilian-style military regime. It was in this way that former minister Mario Henrique Simonsen classified the attempt by the Castelo Branco government (1964-1967) to prohibit the correction of wages in Brazil for past inflation.

A proposal in this sense is part of a government study obtained by the Sheet last week. This is a package of changes in public accounts, which includes the end of the correction of the minimum wage and social security benefits by the INPC (National Consumer Price Index) of the previous year. They would go up according to the expectation or the inflation target.

As Simonsen described, Castelo Branco’s salary policy was “violently criticized” for being based on a formula that compressed the purchasing power of workers whenever the inflation rate was underestimated in the 12 months following the collective bargaining agreement, which had occurred in 1965 and 1966. The result, at the time, was the revision of the wage law in 1968.

Rules in this sense are also a reality in other economies. In the eurozone, more than half of private sector workers are in countries where inflation does not play a formal role in wage setting, despite being an important factor in negotiations, according to a report by the European Central Bank.

Formal indexation schemes apply to countries with 18% of workers in the region. In most cases, with adjustments based on the government’s inflation prospects, as in Italy.

The minimum wage is automatically indexed to past inflation in economies that account for less than 20% of the labor market, including France, and the weight of this floor in total wages is relatively smaller than in Brazil. Only 3% of workers are in countries with all wages automatically indexed, such as Belgium and Luxembourg.

In the US, the national floor is readjusted by decision of Congress, without a specific rule.

In Brazil, wages above the minimum wage are freely negotiated, with about 60% of collective agreements achieving gains equal to or above inflation, according to the most recent data from Dieese.

If the target correction rule had been applied since 2002, the minimum wage, currently at R$ 1,212, would be R$ 502, according to the calculation made by Made (Center for Research in Macroeconomics of Inequalities of the University of São Paulo).

real gain

A proposal to correct the minimum wage (but not pensions) by the inflation target is part of an article by economists José Luis Oreiro and Julio Fernando Costa Santos. They consider, however, the incorporation of a real gain, through the increase in productivity measured by the five-year moving average of GDP per capita.

Oreiro does not rule out that part of his proposal has been incorporated into the study by the federal government, but says he is against a correction that does not generate a real gain for the worker. For him, the government wants to re-edit the salary squeeze of the Paeg (Government Economic Action Plan), launched in 1964.

“A minimum readjustment rule that does not foresee real growth is a great injustice to workers, because productivity gains will not be appropriated by wages, but will be appropriated by profits”, says the professor of the Department of Economics at UnB ( University of Brasilia).

Professor Rodrigo Patto Sá Motta, from the Department of History at UFMG, also claims that the rule may re-edit the salary squeeze promoted in the 1960s. At the time, with the main objective of controlling inflation. Now, mainly targeting Social Security spending.

“It is noteworthy that Paulo Guedes [ministro da Economia] go get a wage policy that is clearly inspired by the dictatorship, when the minimum wage had a brutal loss of real value.”

From Vargas to Plano Real

In Brazil, almost 30 years after the Real Plan limited the broad indexation of the economy promoted during the military dictatorship, automatic price correction mechanisms continue to fuel inflation. Either by decision of the public sector, or by preference of private agents.

Tariffs for basic services, such as electricity, sanitation and public transport, are based on price indices. Rents are adjusted annually for past inflation. Inflation-indexed government bonds are among investors’ favorites. And the country’s main fiscal rule, seen as a liberal economic measure, is based on the consumer price index.

Indexation is one of the main factors that explain inflationary inertia, that is, the movement that causes price increases to perpetuate and be passed on to the entire economy.

Prohibited by a decree issued by Getúlio Vargas in 1933, it became a government policy from the Castelo Branco administration onwards and one of the main drivers of the inflationary spiral in the following decades.

In 1994, the Plano Real law restricted its application to the job market, the financial market and contracts with a term of no less than 12 months, putting an end to daily or monthly triggers.

In his book on the 30 years of indexation that preceded the Real, former minister Mario Henrique Simonsen states that no country has developed a monetary correction system as sophisticated as the one adopted by Brazil until then, with a mechanism that was explicitly incorporated into the policy economic.

For Simonsen, what promoted inflationary inertia was not the permission of rules to automatically correct values ​​for past inflation, particularly in the case of wages, but their compulsory nature.

Mateus Boldrine Abrita, author of several works on the subject and professor at the State University of Mato Grosso do Sul, says that a new round of de-indexation of the Brazilian economy depends on a few factors, such as keeping inflation low for a long time and seeking correction indices. based on longer-term averages. For this, it is also necessary for the State to set an example.

“We reached the point of indexing public spending to past inflation with the spending ceiling. In countries with a tradition of controlled inflation, agents are generally looking forward to the central bank’s target and expectations. history of high inflation, excessive indexation and distributive conflict, you look at the past, and this feeds inflationary inertia”, says the economist, who is in favor of the minimum wage correction rule that takes into account the replacement of inflation plus GDP variation.

‘Rent inflation’

In their most recent reports, the World Bank, IMF (International Monetary Fund) and BIS (the central bank of central banks) warn of the risks of a greater indexation of the economy, given the delay in controlling the current global inflationary wave, which can hamper the work of central banks.

The European Central Bank, on the other hand, states that, unless the recent price shock leads to a significant increase in wage indexation, a generalized and automatic transmission seems quite unlikely given the current mechanisms. The institution also highlights that the period of low inflation seen after the 2008/2009 crisis reduced the degree of indexation of the region’s economies.

In Brazil, there have also been advances in recent years, such as the attempt to unlink several contracts from the correction by the IGP-M, from the FGV, an index strongly influenced by exchange rates and wholesale prices. The government no longer sells government bonds with this index. Several tariffs started to be corrected by indexes based on sectorial costs.

FGV itself launched an index of variation of residential rents, which can replace the IGP-M as the “rent inflation index”, and many of these contracts started to be readjusted by the IPCA.

Inflationary memory, however, is still a factor that weighs even in private negotiations. Despite the end of hyperinflation, the consumer price index remained at 7% a year, on average from 1995 to 2021, having surpassed the double digits on four occasions. The figure is double this year’s inflation target and exceeds the tolerance limits established since 2006.