Unemployment and Economic Growth: An Apparent Contradiction

Last month Brazil’s statistical and record keeping government entity –  IBGE – reported record low unemployment.  The figure, if I remember correctly, was 4.5%.  When I worked for the Brazilian government in the 70’s and 80’s, I dabbled a bit with unemployment figures while seeking ways to increase employment.  At the time, the official (IBGE) figures were always between 14 and 17 percent.  Obviously, there has been a tremendous drop in unemployment.  Economic stability and democratization both play into this reduction.  The combination of stability and political opening after many years of very high inflation and military dictatorship freed up repressed demand and latent entrepreneurship. 

 

The problem now is that the economy is no longer booming.  In fact, GDP growth last year was just 1 percent and the consensus is that not much has changed and 2013 will probably be a period of disappointing economic performance.  Does that mean that employment should fall?  Theoretically, yes.  However, Brazil often defies theory.  If you travel to Brazil, especially Sao Paulo, Rio and Belo Horizonte, most likely you will be impressed by the full flights, full hotels, full restaurants and apparent abundance of cash.  Brazilians are spending and paying very high prices when compared to the US or even Europe.  One explanation is that near half of Brazil’s economic activity is still in the informal sector and therefore not accounted for in official tabulations.  It may be that official unemployment may remain low for a period even in the absence of economic growth in the formal sector.  Increasingly, Brazilians have decided that the formal labor legislation, known as the CLT, is no longer beneficial.  Employers prefer not to have “CLTistas” and many workers are either resigned to taking informal jobs or, alternatively, set themselves up as “consultants” in mini-enterprises and take care of their own safety, health, injury and pension network.  Certainly, not an ideal situation, but one of the many reforms that Brazil needs to address. If the economy continues its weak performance in 2013, unemployment will have to go up but with a presidential election in 2014 and with campaigning already underway, the government wants to avoid having to deal with this problem.  Piecemeal solutions may include special programs and targeted spending but that leads to another unattractive situation, i.e., the return of inflation. Right now, things seem not too bad and better than what the economic growth statistics portray, but if both the job and inflation numbers turn in the wrong direction, big problems could appear on the horizon.

 

 

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