Brazil’s Persistent Unemployment Challenge

Brazil’s Persistent Unemployment Challenge

High unemployment may become the greatest test for the new government of President Jair Bolsonaro and his Minister of the Economy, Paulo Guedes. Bolsonaro promised to fight corruption and crime during the 2018 campaign season, but a 12.4 percent unemployment rate now threatens to curtail his popularity. According to a September 2018 DataFolha survey, only 14 percent of voters considered unemployment the number one problem facing the new government. The survey showed that most voters were concerned with public healthcare, violence, and corruption. Bolsonaro won the presidency because he exclusively focused on violence and corruption, albeit without well-defined policy prescriptions. Bolsonaro and Guedes gave little attention to the unemployment challenge and asserted that future fiscal stability and deregulation would spark accelerating job creation.

Brazilians still worry about their public healthcare delivery system, corruption, and crime, but are now forced to grapple with the day-to-day threats to their economic welfare after the election. According to a recent CUT/Vox Populi public opinion survey, 62 percent of Brazilian workers fear losing their job. The proportion dips to 54 percent for those who support the president. Today, the major cause of workplace stress in Brazil is the fear of unemployment. The new government has yet to acknowledge these fears and the high unemployment rates. Recently, Bolsonaro openly doubted his government’s own estimates. The #elenao movement failed to prevent Bolsonaro’s election, but persistent unemployment could puncture the president’s bubble before the 2020 municipal elections.

The Scope of Unemployment

Brazil’s devastating recession from late 2014 through the end of 2016 rocked the political system and propelled unemployment rates to their highest levels since 2002. The lines of idle workers more than doubled, reaching their peak at 13.3 percent during the second quarter of 2017 according to the Brazilian Institute of Geography and Statistics (IBGE). The unemployment rate receded in the second half of 2017 and well into 2018 before rising again to 12.4 percent during the first quarter of 2019. Brazil’s high unemployment rate far surpasses that of its regional peers and exposes the shallow depth of its sluggish recovery. The economy grew by 1.5 percent in the first quarter of 2017 but slowed down during the following seven quarters leading up to the inauguration of President Bolsonaro. Most economists are now downgrading growth projections for 2019 while 13.1 million Brazilians search for work.

Relentless unemployment unfolds in association with a decline in formal job creation, the increasing duration of unemployment, and a rise in underemployment and precarious forms of work. These concurrent trends will intersect across regions and the most vulnerable populations to unleash greater opposition to the Bolsonaro administration’s economic policies during the run-up to the 2020 municipal elections. Table 1 reports the unemployment rates for the nation’s five distinct regions from 2016 to 2018. The table reveals that higher levels of unemployment are found in the very populous Northeast and Southeast regions, which include a majority of Brazilian voters and most of the largest metropolitan areas in the country. After modest declines in 2017, both the Northeast and Southeast suffered setbacks in 2018, with increases to 14.84 percent and 13.20 percent respectively. In the Northeast, most of the state capitals experienced extremely high levels of unemployment in 2018, led by Macapá (18.2 percent), the capital of Amapá, and Manaus (18.1 percent), the capital of Amazonas. In the Southeast, the mega-cities of Rio de Janeiro and São Paulo registered 12.6 percent and 14.2 percent respectively. Additionally, the 2018 nationwide average for metropolitan areas was 14.42 percent, well above the national average and rural unemployment rates. Brazilian unemployment is clearly a national issue with high concentrations in the largest metropolitan areas.

 
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Brazil’s employment challenge is complicated by the recent increase in the number of unemployed workers who seek more hours of employment. During the first quarter of 2019, 7.2 percent of employed workers were employed for less than 40 hours and were searching for more hours or full-time positions. This measure surpasses the levels for 2017 (6.6 percent) and 2016 (5.3 percent). The underemployment setback overlaps with the concurrent contraction of the EAP by 1.1 percent during the first months of 2019. The difficulty of finding employment has also forced Brazilians to accept precarious forms of work or carry out income generating activities (self-employment) in the underground economy where regulations and payroll deductions are commonly circumvented. While formal employment contracts, precarious labor, and self-employment continue to expand although at lower levels than in 2017, researchers at the Institute of Applied Economics (IPEA) conclude that these measures demonstrate a slow labor market recovery with enduring high unemployment and underemployment, especially among youth, women and lower skilled workers. In addition, there is a growing contingent of working aged Brazilians who have given up hope of finding a job.

Unemployment and the 2020 Elections

The slow recovery punishes most workers and tests elected policymakers in Brasília. 65.7 million working age Brazilians do not participate in the labor force, an historic and dismal record for the nation. Too few Brazilians are working to constitute sufficient consumer demand to trigger investment and spur higher economic growth. The Bolsonaro government has yet to recognize the scope of the policy challenge or the complex association between employment and fiscal adjustment. Recently, Minister Guedes spoke at The Brookings Institution about Brazilian economic and fiscal policy, and did not even refer to unemployment as an economic problem or policy challenge. Fiscal stability and the future success of the government’s social security reform are dependent on the number of workers employed in the formal labor market who pay recurrent payroll taxes, including social security. In the midst of the recession, nearly 66 percent of the employed workforce contributed to the social security system in the last quarter of 2015. However, this proportion fell to less than 64 percent by 2018, made worse by the very low levels of participating contributors among the self-employed and precariously employed (23.0 percent and 26.6 percent respectively).

The government’s efforts to cut the federal budget and fix the social security system are necessary but are clearly insufficient to sustain an economic recovery or achieve fiscal stability. João Sicsú  and Marcio Pochmann argue that fiscal consolidation policies adopted in 2015 under the Workers Party administration of then President Dilma Rousseff precipitated the dive into recession and undermined a full recovery. Minister Guedes’ version of supply side economics and trust in fiscal consolidation may pan out in the long term, but there is a threat that his belt tightening policies and social security reform could produce higher levels of unemployment in the short run. Indeed, Brazilian investment bank BTG Pactual forecasts that unemployment will not drop below 10 percent until 2021.

President Bolsonaro achieved electoral success by blaming the Workers Party and the political establishment for the country’s shipwreck. However, if the Brazilian president fails to tackle unemployment soon, then the 2020 municipal elections may become a national referendum on the state of the economy and presidential approval. President Bolsonaro faces a fork in the policy road: either carry out a fiscal adjustment that sets aside public funds for job creation programs with a focus on labor-intensive sectors like construction or follow Minister Guedes’ supply side policy agenda and hope that investment and employment rise. This second road promises electoral defeat for the president’s Social Liberal Party and his closest allies in most of Brazil’s largest cities in 2020. His decision to either wrestle or ignore the unemployment challenge will shape his own political fate for years to come.

Mark S. Langevin, Ph.D. is Director of BrazilWorks (www.brazilworks.net) and a Senior Fellow at the Schar School of Policy and Government at George Mason University.  Dr. Langevin researches and writes extensively on economic, energy, and trade policymaking. He is a regular contributor to the London School of Economics and Politics blog, the Inter-American Dialogue’s Latin American Advisor, Journal of Energy Security, Journal of World Trade, the Labor Studies Journal, Review of Renewable Energy Law and Policy, and Universitas: Relações Internacionais. He earned a Ph.D. in Political Science and a M.A. in Latin American Studies from the University of Arizona in Tucson, and a B.A. in Public Health from The Evergreen State College in Olympia, WA. He can be contacted at: mark@brazilworks.net.