Brazil labour market program, there is no free ride

In order to slow the deterioration of Brazil's labor market, the government announced a program that will allow firms to decrease its employees' wages (and working hours) and the government will compensate half of the salary loss to employees. Although needed, fiscal conditions are not favorable for the government to support pro-labor, anti-cyclical policies. This program could mean fiscal expenditures of up to 56% more than what it would pay in unemployment insurance, decreasing the likelihood of reducing income transfers and stabilizing debt in the medium term.

This announcement exemplifies quite well the views that the significant unpopularity of the president amid a growth recession and macroeconomic adjustment hampers the much-needed fiscal consolidation in Brazil.

On the one hand, increasing expenditures for employed people rather than raising income for the unemployed is more productive. For companies it should also be interesting, given the high cost of hiring and firing in Brazil. On the other hand, the sectors covered by the program have not been disclosed by the government, making it hard to calculate a reasonable estimate of the fiscal effect.

However, we suspect that this program could actually cost more than unemployment insurance alone. In the extreme scenario in which employees enjoy the limit of the benefit for a whole year, a simple calculation shows that the government could spend 56% more under this program than if it only paid unemployment insurance; however, this doesn't take into account the compensation in revenues that an employed person would provide.

In any event, market observers will likely continue discussing the conditions in which further fiscal consolidation will have to be made. Meanwhile, the government is expected to continue to be tempted to provide anti-cyclical fiscal measures. The government might fail to meet the primary surplus target in this and the next few years, making it harder to stabilize the gross debt in the medium term, says Barclays.