Bloomberg News

Bets on Brazil Recovery Hold Unemployment at Record Lows

August 23, 2012

Brazilian metal worker Danilo Gritti didn’t lose his job in a Mercedes-Benz (DAI) bus and truck plant when demand slackened earlier this year. Instead, he and 1,500 colleagues got a five-month furlough, the equivalent of full pay, and almost all their benefits -- and are still counted as employed.

Such labor deals have helped keep Brazil’s jobless rate at record monthly lows even as the economy slows. Gross domestic product will expand 1.8 percent this year, its second-weakest performance in nine years, according to economists surveyed by the central bank. Brazil created more jobs than it lost between January and July, albeit at a slower rate than last year.

One reason joblessness remains stable is that companies expecting an economic recovery are hesitant to fire skilled workers and instead are resorting to temporary layoffs and reduced hours, which also avoids costly severance packages. The labor market has been the cornerstone of Brazil’s consumer-led economic growth over the past decade, and policy makers say rising real wages will keep fueling demand.

“Employers are looking to the future and betting there will be an improvement in the second half and in 2013,” said Luiz Edmundo Prestes Rosa, education director at the Brazilian Human Resources Association, a group of personnel professionals who follow labor market trends. “The majority of CEOs are concerned that if they fire people, the staff would be hard to recover again,” he said from Sao Paulo.

GDP Growth

Economists surveyed by Bloomberg forecast gross domestic product will expand at an annual rate of 2.1 percent in the third quarter and 3.1 percent in the fourth quarter, up from an estimated 0.9 percent in the three months ending in June. Policy makers have cut the benchmark lending rate by 450 basis points since August 2011 to a record low 8 percent, granted tax breaks on consumer and industrial products and extended subsidized lending to help speed growth.

Brazil’s retail and services sectors have helped offset a 1.2 percent decline in industry jobs in the first half of the year. Manufacturers struggling with high tax rates, costly energy, and poor infrastructure have lost market share to foreign competitors, according to the National Industry Confederation, or CNI. Retail sales in June grew 1.5 percent, the fastest rate in five months, signaling that falling borrowing costs and other stimulus measures may be accelerating consumer demand that has sputtered in recent months.

Between January and July, Brazil increased the number of formally registered jobs by 1 million, compared with 1.41 million in the same period last year. This figure does not include people, such as street vendors, who work without a contract and neither contribute to social security nor receive benefits.

Rate Estimate

Economists surveyed by Bloomberg estimate the unemployment rate in July to be about the same as the 5.8 percent recorded in May, the latest month released by the agency that compiles the numbers, which has been on strike.

Drogaria Rosario, a unit of the Brazil Pharma SA (BPHA3) drug store chain, is adding 500 employees this year to its 2,500 workers as it opens 30 stores in suburbs with an emerging middle class and in states with strong agriculture, said operations director Rodrigo Silveira in Brasilia. The labor market is still so tight that it’s hard to find a messenger or cleaner, something unimaginable only a few years ago, he said.

“The economy isn’t galloping ahead anymore but we’re growing at 30 percent a year,” he said in reference to sales growth during an interview.

Average sector wages adjusted for inflation in June were up 2.4 percent to 13.4 percent from a year earlier in the five state capitals surveyed by the national statistics agency. In the six years through December 2011, average inflation-adjusted pay jumped by 30 percent to 2,131 reais ($1,057) per month.

Stimulus Measures

Even in some of the sectors hardest hit by slowing growth, companies have been hesitant to fire workers because they expect government stimulus measures to help the economy, said Flavio Castelo Branco, head of economic policy at the CNI.

One such company is engine maker MWM International, a unit of Lisle, Illinois-based Navistar International Corp. (NAV:US) Edson Tatu, a 35-year-old machine builder, and 1,800 colleagues agreed to a cut of 17.5 percent on wages and 20 percent on work load over three months through August to help MWM weather a downturn in demand and save 700 jobs, he said.

“It’s not bad at all,” Tatu said by telephone from Sao Paulo on his day off. “I have more time with my family. I prefer a wage cut and staying at home to being without a job.” Tatu said he was able to freeze payments on a 17,100 reais loan he took two months ago from an employee credit cooperative.

‘Innovative Solution’

MWM in an e-mail declined to comment on the accord, which was confirmed by Miguel Torres, leader of the Sao Paulo metalworkers union. Mercedes-Benz in an e-mailed statement called its layoffs at the plant in Sao Bernardo do Campo an “innovative solution” to maintain workforce levels. Gritti and his colleagues, who were laid off June 18, receive an allowance from Mercedes-Benz and a government stipend for training, equal to their full salaries, and keep most of their benefits.

Since the 2009 global financial crisis, which caused Brazil’s gross domestic product to shrink for the first time in 17 years, such deals have become more frequent and have given the labor market a cushion to absorb shocks, said Torres.

“Historically, companies fired preventively at the first sign of a crisis,” Torres said in a telephone interview. “Now, we’ve created a culture of finding alternatives, we’re becoming more mature.”

Alternative labor agreements to help preserve employment were the companies’ trade-off for government stimulus measures, including tax incentives for auto sales and fresh investments in infrastructure, Labor Minister Carlos Brizola Neto said on a nationally broadcast radio show on Aug. 16.

‘Different Way’

“Brazil is showing there is a different way to react to the financial crisis, which is betting on its workers,” he said.

Still, if the economy does not rebound, unemployment could balloon, said Rodrigo Leandro de Moura, a labor economist at the Rio de Janeiro-based Getulio Vargas Foundation, an economic research group and business school.

“If economic activity continues declining, firing en masse could begin,” said Moura by telephone from Rio de Janeiro. He estimates that the economy needs to grow 2 percent to 2.5 percent a year to stop unemployment from rising.

The coming months will be key to determining business confidence and the level of employment, said Gilberto Petry, president of Weco SA, which manufactures boilers, furnaces, and heaters in Porto Alegre.

‘Critical’ Quarters

“The third and fourth quarters are critical,” Petry said by telephone. “If we don’t see growth, we can’t maintain employment.”

Like other manufacturers in Brazil, Andre Meyer da Silva, president of Maquinas Condor SA, which makes machinery for bulk handling in Porto Alegre, has maintained his staff to avoid paying high severance costs and losing skilled workers.

“I can’t afford to lose my welder, he’ll run off to the ship-building industry,” said Meyer in a telephone interview. “But I need new orders in three months.”

To fire workers he would have to pay the equivalent of 40 percent of their accumulated savings fund, which in some cases amounts to 1 million reais, Meyer said. Employers must contribute 8 percent of an employee’s salary each month to the fund, which can be used to pay for home purchases, illness, retirement or in the case of dismissal.

A shortage of skilled professionals is driving the demand for foreign labor, pushing up the number of work visas granted to foreigners by 26 percent last year. The country each year has a deficit of 20,000 engineers, according to the Federal Council of Engineering, Architecture and Agronomy.

Confidence Rose

Brazil’s business confidence index in August rose 1.2 points to 54.5 on a scale of 100, though it’s still down 1.8 points from a year earlier, according to the National Industry Confederation.

While metal worker Gritti appreciates his time off reading and relaxing at home, he is aware his job may be hanging by a thread, and with it his plans to buy a house or apartment so he can move out of his parents’ home.

“It’s worrisome, because I don’t know how long I’m going to be at Mercedes and be able to pay with ease,” he said. “But I believe next year everything’s going to get better and that worry won’t exist anymore.”

To contact the reporters on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net; David Biller in Boston at dbiller1@bloomberg.net

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net


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