A historical take on Brazil's informal labor
For the Latin America team, our hypothesis that we are testing is “The informal labor market in Brazil will increase in size relative to the formal market.” Brazil’s current position in the coronavirus pandemic seems volatile and its future murky at best. Despite the uncertainty of the situation, Brazil’s core institutions that have historically fermented informal employment provide great insight into the labor market in 4-6 months.
In the latter half of the 20th century, as Third World countries scrambled to gain a foothold in the world stage, Latin American countries were mired down by dysfunctional management that throttled any economic growth as political will continued to reverberate across the region. In fact, the number of jobs that were being created was way short of demand and could not sustain such a large population as urbanization radically changed the way labor markets operated. This provided the necessary foundation for the flourishing of an informal economy.
In 1982 as Mexico’s debt defaulted, Brazil struggled under this same ineffective management to grapple with the aftermath of major inflation rates, leading the country into many attempts to comply with stabilization programs. The most prominent stabilization program was the Plano Real, which severely cut government spending and introduced a nominal exchange rate anchor for the crowning of a new currency, the Real. While the Extended National Consumer Price Index (IPCA)’s annual inflation declined from 4922% in June 1994 to 22% in 1995, Brazilian manufacturing sectors were faced with insubstantial subsidies, very low external tariffs, and an overvalued exchange rate that caused the decline of jobs. Informal employment rose by about a third while formal employment in manufacturing dropped from 20 - 10%. The manufacturing sector is a common absorber of the formal workforce while services and nontradables are an absorber of informal labor. However some argue that trade liberalization played a relatively small part in the increase of informal employment and that there was no correlation between trade liberalization and informality in the labor market. Instead, the Neoliberal Perspective is used to explain Brazil’s situation.
The Neoliberal Perspective argues that those that are self-employed willingly opt out of the formal economy of their own accord. This perspective determines market efficiency as the driver for informality as formal employment is seen as inefficient as government regulation and oppression creates deadweight loss and other inefficiencies. Potential benefits of informal employment include flexible hours, economic independence, and tax and policy avoidance. In Brazil, the difference between what constitutes as informally employed is if the worker is holding a labor card or not. Formal workers profit from fringe benefits and increase entrance and exit costs for the employer while informal employment is the opposite as fringe benefits are not offered and there are no exit costs. With the 1988 Constitutional changes in Brazil, labor code was drastically affected. The tenets of the changes included increased firing costs, reduced working hours, increased overtime pay, increased vacation pay, increased maternity leave, relaxed limitations on unions, and more. These key areas all targeted increased entry and exit costs for formal employment. In fact, 88% of the increase in informal employment in the recent decade stems from movement of workers from formal to informal jobs within industries. This gives evidence to increasing informality as a structural component rather than with a cyclical one.
Within other Latin American countries, we can see a similar situation of a dynamic labor market in which workers can easily switch to informal employment. In Mexico, workers in manufacturing remain in the same job for an average of five and a half years. Moreover, 85% percent of workers in manufacturing who changed jobs had resigned and a large number ended up self-employed or in the informal sector. In fact, there was no clear evidence if workers made more in informal or formal markets, which gives evidence to the fact that informality is not a masked form of unemployment. Alongside labor code, Mexico’s regulatory framework in a study was found to be 73rd while countries like Kenya, Peru and Uganda scored higher, putting more incentive for informality.
Brazil’s informal labor market is positioned in the coronavirus pandemic to increase in size relative to the formal labor market. As was the case historically, the lack of employment opportunities for urban centers necessitated an informal labor market, which can be seen in Brazil as formal employment opportunities severely shrank. Furthermore, the high exit and entry costs for Brazilian workers seeking work and companies that are financially struggling with lost business incentivizes an obvious increase in informal employment. While Brazil may stave off the worst effects to its economy through relief payments to citizens, Brazil will enter a recession, which will mark a shift towards more informality.
