According to London-based research firm Capital Economics, Brazil’s “puzzling” labor market has continued to defy gravity even as the economy has slowed to a crawl – from 7.5 per cent in 2010 to about 1% in 2012.

Here is what the CE’s emerging markets team led by Mr. Neil Shearing had to say:

“The most puzzling aspect of Brazil’s poor economic performance of the past 18 months is that it has come alongside an improvement in the labour market. We think the explanation lies in Brazil’s low rate of productivity growth. This means that employment may hold up even if economic growth remains lacklustre. But the current high rates of pay growth look unsustainable unless productivity accelerates.

…The movement of workers from the informal “grey” economy to the official (or “white”) economy gives the effect that jobs are being created, when in reality the overall level of employment is unchanged.

… Poor rates of productivity growth make Brazilian firms more reliant on hiring additional workers to increase output. As a result, even at low rates of GDP growth, the economy continues to create jobs.

… Brazil’s productivity problem is underlined by the types of jobs that are being created.

Bottom line: the unsustainable pace of pay growth is another sign that Brazil is reaching the limits of its consumption-led growth model.

Source: Capital Economics

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