Ana Paula Vescovi: The surprising recovery of employment in Brazil

The labor market has shown a robust recovery since the second half of 2021, as a result of cyclical and structural factors. Although the conjuncture is of great importance in this recovery, from the point we are at, structural changes will be the key to reduce unemployment in a sustained way.

On the cyclical side, it is possible to highlight the process of reopening the economy after the pandemic, which benefited sectors more dependent on social interaction, generally more labor-intensive services. Additionally, the lagged effects of the monetary policy, which was stimulating until mid-2022, helped boost economic activity and, consequently, the labor market. Civil construction was one of the sectors that benefited from this scenario, with emphasis on job creation.

As a result, we observed 8.5% unemployment last October (seasonal effects discounted), the lowest rate since 2015, with economic activity still heated and the labor market showing signs of dynamism. The number of unemployed, just over 9 million, is also the lowest since 2015. It is important to remember that, in that year, unemployment showed a trajectory of rapid rise in response to the very tight monetary policy, and a deep recession began there that extended over the following years.

The formalization rate reached its highest level since 2017 in October, discounting the period in which there were distortions arising from the greater impact of distancing measures on informal workers (composition-effect). The survey of the labor market by the Brazilian Institute of Economics (FGV-Ibre) for December showed that 87.7% of informal workers yearn for a formal occupation.

We are now seeing a slowdown in the pace of job growth, which appears to be more linked to labor supply factors (people looking for work again) than to a slowdown in demand (firms needing more workers).

The percentage of people of working age who are looking for a job has been falling since mid-2022, while the average real income has expanded by 6.2% in the year (up to October, seasonally adjusted), even with inflation being very pressured in this period. time course.

Structural factors, in turn, are essential for the labor market to be able to sustain lower unemployment rates and with greater formality in the long term, without risking pressure on inflation.

Advances that allow less asymmetry of information between those looking for work and those offering job vacancies; greater legal security with lower transaction costs for those who (dis)contract; and simplification of rules, tend to reduce the natural unemployment rate, that is, the one that does not generate inflationary pressures. This rate is related to frictions arising from workers seeking replacement between different productive sectors or, even, retraining themselves to seek better opportunities in the future.

In this context, the 2017 labor reform provided important space for the permanent reduction of unemployment in Brazil. The reduction in legal uncertainty when hiring made room for an estimated permanent drop of 1.7 percentage points in the unemployment rate, according to a recent study carried out by researchers at the University of São Paulo (Labor Courts, Job Search, and Employment: Evidence from a Labor Reform in Brazil, 2022).

Additionally, flexibility through new hiring modalities –such as intermittent and temporary employment– makes it easier to adapt vacancies offered to workers, and leads to a positive impact on the level of occupancy.

International evidence proves that, even among developed countries, greater job creation is associated with environments with greater flexibility in labor relations, less extensive protection and lower taxation in labor relations, according to a study by the IMF (Job Creation: Why Some Countries Do Better, 2000). Another recent study (Key Determinants of Job Creation: A Comparative analysis between OECD Countries and Emerging Economies, 2020) shows that both economic growth and productivity growth generate positive impacts on job creation.

In short, for the recent gains in the labor market to be maintained in the long term, it is essential not only to maintain the advances adopted in recent years, but also to adopt new measures that reduce information asymmetry and allow lower unemployment rates to be achieved. sustainable in the long term.

Additionally, efforts to increase productivity and potential growth in the Brazilian economy also tend to bring gains to the labor market, especially in the context in which the country has had low productivity for decades, especially in comparison with other emerging countries.

Finally, the possible negative consequences that the pandemic brought to the education of the next generations must be monitored and corrected, in order to avoid future losses in the qualification of workers.

In contrast, demand-driven measures, such as monetary and fiscal stimulus, should be limited to addressing short-term issues. The artificial maintenance of the unemployment rate at a level below equilibrium tends to generate inflationary risks, and the consequent need for costly adjustments later, resulting in long periods of high unemployment, as observed during the 2014-16 crisis.

There is no magic way to reduce unemployment.