Opinion – Samuel Pessôa: Full employment

There is a whole recent debate in monetary theory. In the traditional view, the interest rate is the regulator of aggregate demand. If inflation is above the target and the same occurs with the expectation of inflation, the Central Bank raises interest rates. Everything happens inversely if inflation and inflation expectations are below the target.

There are alternative readings. The most popular in many circles has been modern monetary theory (MMT). As I have discussed in this space, there are no big news in TMM. What is new is not good, and what is correct is not new.

In any case, even TMM supporters recognize that the limits to a loose monetary and fiscal policy are given by the economy’s resource constraints. That is, complex monetary issues are ultimately subordinate to the old and well-known scarcity.

The divergence, therefore, is with the point at which an economy operates at full employment. TMM adherents consider that economies operate at full employment when the unemployment rate is well below 5%. Probably around 3% or a little more. These points were dealt with in the December 17 column.

In the last quarter of 2022, the Brazilian unemployment rate must have been around 8%. As I argued in the December 17 column, since 1996 unemployment has only been below this value in a period when there were clear signs of imbalance, between the 4th quarter of 2011 and the 1st quarter of 2015.

In this period, service inflation was always above headline inflation and wages always rose beyond labor productivity. Another sign of imbalance was the worsening of external accounts and public accounts that occurred in the period.

Several readers consider that it makes no sense for full employment to occur with unemployment at 8%. However, there are several countries where the unemployment rate that keeps price and wage inflation stable is close to 8%. That unemployment rate that keeps price and wage inflation stable is also known as structural unemployment.

According to data from the European Commission, the structural unemployment rate varies from 3% in the Czech Republic to just over 13% in Spain. For Italy, the rate is 9.5%, and for France and Portugal, 8.5%. I considered the average of structural unemployment for the period 2015 to 2022. That is, the Latin countries of Europe present values ​​for the structural unemployment rate above 8%.

An approximation of structural unemployment is given by the average unemployment rate over a long time horizon. Between 1996 and 2013, average unemployment in Brazil was, according to data from Pnad Contínua, 9.7%. With the Temer government’s labor reform, it is possible that the structural unemployment rate has dropped to something closer to 8%. We still don’t have enough data to measure.

In any case, and based on the experience of the Latin countries in Europe, there is nothing strange about an unemployment rate that does not accelerate inflation to around 8%.