Smaller expectations

In a global economy with companies looking closer at the bottom line jobs have been the main casualty. For Brazil as for the rest of the capitalistic word the challenge has been how to create new jobs to counterbalance the inevitable downsizing of some businesses.

Carlos Emmanuel da Fonseca Barreto

AT&T recently announced the laying off of 40,000 employees in a reorganization plan to decrease costs. The process of globalization that the world is experiencing has pushed companies to trim their work force to become more competitive. Nowadays, this reduction in employment has been associated with countries embracing free market policies and unemployment haunts every economy on the face of the earth, in both developed and developing countries. According to Henry Farber, an economist at Princeton University, employment stability fell from 10% to 20% for workers between the ages of 45 and 54.

Job insecurity is not just for factory floor workers anymore. Executives and all kinds of white collar workers are having to deal with the problem. The vulnerability of these high level workers has echoed to the government machine, and pressured politicians to look at the laws governing business and adjust to the new economic environment in their countries. But how much can an association between globalization and international competition, and low employment be held in balance?

The great majority of economists believe that free market policies shift the labor force from one sector to another and that high levels of unemployment reflect the government's inability to deal with economic changes. Argentina, starting in 1991, opened its economy to the world and last year reached a record unemployment rate of 14%. In 1995, 400 thousand Brazilians lost their jobs, the largest number in five years. However, statistical figures showed that during the same period, the average income rose 20.3%, which means that job loss doesn't mean unemployment but a lack of formal contracts.

Brazil, with similar policies of economic openness as those adopted by Argentina, has not suffered from profound structural unemployment. The cause of this low unemployment rate is the informal economy which generates millions more jobs than the formal sector. A recent study by IBGE (Brazilian Institute of Geographic Statistics) has shown that 55% of the Brazilian work force does not have contracts. How can firms support a business laws that do not reach half of the country's work force?

In January, an accord achieved between the Metalworkers Union and eight groups of industries in the FIESP (São Paulo State Industrial Federation) marked the turning point in the dominance of the Brazilian market. The accord promulgates a balance between payroll deductions and workers rights: temporary contracts with lower social assessments. For example, a firm would hire 85 new employees under the new contract while through legal means they could only afford 74 employees. Under current law, the difference in 11 employees' salaries would be consumed in social contribution.

President Fernando Henrique Cardoso says that the accord was very positive because the idea came from workers. Nevertheless, the agreement ended up being suspended due to legislative constraints and because of claims that it would favor firms that withhold taxes. According to Congressman Roberto Campos, the laws should adapt to the economy and not the other way around.

Brazil has one of the highest costs of production in the world which is constantly emphasized by the expression "Custo Brasil" (Brazil's Cost). Furthermore, the social responsibility burden represents the highest cost to this Custo Brasil and it creates impediments to economic development. To create more jobs, companies need greater amounts of capital to invest in new plants.

The open door policy may cause high levels of unemployment and in order to fight that corollary, the country must adopt strong political commitments to create new jobs. These commitments are incentives to sectors which absorb a greater contingent of the working force (i.e., construction and tourism) and a reform to the labor legislature.

In construction, high interest rates impede financing of residential units because the Real stabilization plan requires high interest rates to control consumer spending. Further, the public deficit undermines new infrastructure projects because to balance the budget the government must privatize state-owned enterprises and cut government spending. Therefore, the creation of new jobs through incentives for construction seems difficult to achieve. Along those lines, incentives for tourism depends on a very important factor: fighting crime. Brazil is one of the few countries in the world that has been losing international tourists due to mounting crime rates.

Labor Minister Paulo Paiva has committed his term in office to the creation of a new law that institutes temporary working contracts. The project being drafted is intended to combat the informal sector as well as unemployment. Mr. Paiva promises that companies will spend less on social assessments including dismissal charges. The temporary contract will allow for periods of up to two years and it will be available to 20% of the firm's total employees. Furthermore, no employee may work more than 120 extra hours per year.

The accidental insurance, the educational salary, and the contributions to SENAC (National Service for Commercial Apprenticeship), SENAI (National Service for Industrial Apprenticeship), and SEBRAE (Brazilian Service to Medium and Small Enterprises) will have a 10% deduction. The FGTS (Guaranteed Retirement Fund for Time of Service) falls from the present 8% to a 2% level. Moreover, in lay-offs, the employer will not have to give severance pay nor pay the usual 40% penalty to the FGTS.

The project is unprecedented in Brazilian history, especially in that it has been consented to by firms and unions. Congressional approval is required to institute the new legislation and lobbies have been pressuring politicians to pass the amendment which is scheduled to go into the plenary assembly in the coming months.

The long-needed labor reform will boost investments from firms that have not pursued it due to the constraint of the present social contributions. This in turn should lead to increasing job offers and a decline in the unemployment rate. It might prove that the so-called liberal economists are after all correct when they say that free market policies require government adjustments to the new economic environment.