Economic Insights into Brazil's Labor Future
Economics. It is the field that underpins the fundamental explanation behind any market trend. And seeing how the informal sector is only a subset of the labor market, it is of vital importance for any researcher to delve into economics to grasp a better understanding of potential projections regarding the size of the informal sector. Therefore, this article will be somewhat more theoretical than those of the other research fellows on the Latin America’s Emerging Economies team, although all the theory is ultimately grounded in trends observed in Brazil.
Before we get lost in the vast expanse of the academic field that is economics, we must focus our attention on a path. Specifically, our economic framework to understand this question requires us to look at two different economics metrics that could potentially give us insight into the future size of Brazil’s informal market: education and labor regulation.
In economics, education seems to be a panacea for all ails--and for good reason. It represents one of the most potent long-term investments that a government can make with its money, particularly because of the positive causal relationship between education and productivity (at least in theory). The more educated a worker becomes, the more skilled he becomes--and ideally, the more productive that he becomes, thereby increasing output per capita (GDP per capita) for the nation. Specifically to the informal sector of Brazil, though, Daniel Haanwickel (Berkeley) and Rodrigo Soares (Columbia) have discovered that a 6.4% increase in the share of college-educated population between 2003 and 2012 was significantly correlated with reductions in informality. They come up with two potential reasons for this correlation: First, supply and demand theory posits that as the number of unskilled workers decreases (due to education), the higher that wages (in the formal sector) rise for unskilled workers. Second, as a consequence of the decreased supply of unskilled workers, existing unskilled workers in the formal sector will become more productive due to the theory of diminishing marginal productivity. Both these reasons underlie a key insight: formal firms are more likely to hire unskilled workers, which means that these unskilled workers do not need to resort to informal employment for income-generation. Therefore, if policy is any indicator of education, it will be important to monitor any long-term investment in human capital that the Bolsonaro administration places on education, for that will be a key determinant to understanding the future size of the informal market. Namely, educational policies will ensure that the formal sector will increase relative to the informal market.
The other economic metric to consider for the projection is labor regulation, a concept that is intricately very attached to the research of the team’s other research fellows too. Labor regulation encapsulates the entirety of any law or rule placed by the government unto the labor market (e.g. minimum wages, contractual rigidity, payroll taxes, social protection, etc.). Perry et al noted that after the constitutional reform of 1988 in Brazil, which introduced new labor regulations, transitions from the informal to the formal sector became significantly lower than flows in the reverse direction. Naercio Menezes Filho and Luiz Scorzafave corroborate such findings with their own research findings, which find that even job security and employment protection regulation in Brazil--which seek to protect workers--actually tend to correlate with higher informality rates. The rationale for firms is that as it becomes more difficult (and consequently costly) to operate formal employment, it benefits firms to take some operations into the informal sector by signing on those that are most willing to take on these informal agreements. For example, when workers’ and employers’ contributions to social protection are too high, they both are incentivized to establish ‘informal’ relationships. It is important to note, though, that such dilapidated incentives exist for workers outside the formal sector. If a worker is already employed in the formal sector, they stand to lose their employment benefits were they to revert to the informal sector. Therefore, any indicator to the Bolsonaro administration's policies regarding labor regulation will also be essential in understanding our potential projection.
As the COVID-19 pandemic continues to ravage Brazil, both these trends actually point to a negative finding: that as the Brazilian economy continues to be exogenously impacted by the pandemic, Brazil will be unlikely to reap potential formal sector employment due to underlying macroeconomic trends. Not just particular to Brazil, education has been greatly negatively impacted by the pandemic due to social distancing measures, which effectively hinder the ability for children to attend educational institutions. Coupled with the notion that education is a long-term benefit, Brazil will most likely not benefit from the same production of skilled workers as they have been in the past decade. Furthermore, the nature of current cash transfer programs (such as the Emergency Basic Income) makes it so that the middle-income population are those that are most financially impacted by the pandemic. These cash transfer payments seek to financially support low-income populations during the pandemic--whereas those families that rest just above the low-income threshold stand the most to lose by reverberating back to poverty. It is unclear what the Bolsonaro administration’s response to such an adverse economic trend would be in terms of labor regulation--thus, in this notion, economics can only underlie a potential theory, not a conclusive projection.
