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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, we think 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, says Barclays.
The government announced yesterday a program aimed at containing rising unemployment in Brazil. The companies that adhere to the program, in accordance with the respective workers unions, will be allowed to decrease employees working hours and salaries up to 30%, for a maximum period of one year. Of this 30% reduction in salaries, up to 15% will be compensated by the government (with a cap of , or 65% of the maximum unemployment insurance individual benefit). The government's intention is to avoid further deterioration of the labor market while not increasing the unemployment insurance expenditures or further contract fiscal revenues, which a drop in the employed working force could bring.
It is expected, this announcement exemplifies quite well that, the significant unpopularity of the president amid a growth recession and macroeconomic adjustment hampers the much-needed fiscal consolidation in Brazil, estimates Barclays.
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, it is expected 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, says Barclays.
