In a recent note to clients, Itau’s Chief Economist Ilan Goldfajn explains why the job market in Brazil remains heated even as the economy slows down… he presents two alternatives for his explanation: lower productivity and high costs to layoff. Highlights (in English) below… full text (in Portuguese) can be downloaded at the bottom.

1. Worker’s productivity 
“…Some fear that the combination of record low unemployment with a weak economy signals problems ahead. After all, we are producing less with more people – lower productivity. The economy might be showing signs of exhaustion that could turn out to be more durable. An economy with lower productivity is bound to grow less and / or have higher inflation. The risk is that re-igniting of the economy will further reduce unemployment by making labor scarcer, raising costs for businesses, which could result in more inflation. Controlling inflation would require lesser growth.

But what is the reason for the worker’s productivity to fall? With higher economic growth in recent years, companies have found it increasingly difficult to hire qualified labor. The solution has been to hire part of the population that is less qualified than current employees. It addresses the immediate needs, but the productivity of these workers is lower, which drops the average productivity of the economy…
The lack of labor is partly the result of a lower growth of the Economically Active Population (EAP). In 1980, the growth rate of EAP was up 3% a year and now, growth is 1.3%, given the population distribution. With fewer people available to work, a period of higher growth reduces unemployment and limits sustained growth. 
Brazil is still young, but less than in the past. The lack of skilled labor in Brazil is the result of insufficient improvements in education to meet the current needs…”

2. Executives may be avoiding layoffs 
“… The cost for companies to layoff and re-hire is high in Brazil. If the executives have confidence in an economic recovery and growth in the medium term, they may prefer to keep workers idle for some time instead of firing (and then re-hire) them. The experience of recent years, mainly a reaction to the crisis of 2008/9, might be inducing this behavior. The Brazilian economy recovered quickly from the impact of the crisis internationally. Hence, executives do not layoff, and the economy sustains a number of idle workers ready to be used in the futureIn this alternative, the low unemployment is a function of expectations around future growth.


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