An excerpt from a Merrill Lynch research report authored by David Beker.

The Brazilian labor market continues to accommodate with job creation declining, but not yet at a rate sufficient to trigger a significant increase in the unemployment rate. After reaching its lowest historical level at 5.5% in November 2011, the unemployment rate climbed back to 5.8% in March and is now at 5.9%, according to seasonally adjusted data from June. Without adjusting for seasonal factors, the unemployment rate rose to 5.8% in May 2012 (vs 6.4% in May 2011) from 4.7% in December 2011. Some sectors may need to let people go, but other sectors are still hiring, which suggests labor reallocation instead of strong deterioration in labor markets.

Additionally, economic activity has surprised on the downside since the beginning of the year, with industrial production contracting in four of the last seven months and the Brazilian Central Bank activity index decelerating to 1.40% yoy in May, down from 2.40% yoy in January (Chart 18). Both supply and demand indicators have shown some weakness in the last releases despite the original expectation for stronger activity in 2Q. An eventual deterioration in labor markets is a key risk for economic activity….

To better understand the Brazilian labor market it is important to take into account the extremely rigid labor legislation in place since 1943. Brazil has one of the highest costs of dismissal in the world with several taxes and charges, making the labor market more resilient to activity deceleration than other countries. Labor markets in other countries are much more flexible and have higher correlation to activity indices such as IP (Chart 20, Chart 21 and Chart 22).

Despite showing some signs of accommodation, occupation remains high and real income is still an issue to focus on. We expect real wages to keep pressuring services inflation and reducing the industry’s competitiveness.

Source: BofA ML

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