When Time magazine awarded Brazil’s President Lula the most influential world leader spot in its 2010 ranking of most influential people, Michael Moore, who wrote the excerpt on Lula, heralded the creation of the Bolsa Familia programme as well as the expansion of public education and health care. These are important achievements, but one of the great successes of Brazil of the past eight years that has gone largely unnoticed outside Brazil is the creation of 12.5 million formal jobs during his tenure. During the 2000s, formal job growth outpaced informal job growth by a three-to-one ratio, reversing the trend of growing informality that had marked the 80s and 90s. And all this occurred at the same time that the minimum wage doubled in real terms.
Rising formality in Brazil — as well as in its neighbour, Argentina — is significant not only for future policy design in Brazil and larger debates within the country about the role of government, but also because it can shed light on several other debates in economic development. First, debates on what economic model is best for economic growth and job creation. Second, whether growth in and of itself is sufficient for improving working conditions, or whether government intervention is also needed. And third, the debate — or rather the neoclassical claim — that labour market regulations impede job creation.
Since 2003, economic growth has averaged 4.4 percent, and though not stellar, it has been more inclusive with the Gini coefficient falling from 0.59 at the beginning of the decade to 0.54 in 2009. Two-thirds of the fall is attributed to the minimum wage and the rest to the social safety net, in particular the rural pension which provides benefits equal to the minimum wage to 8.3 million rural workers, the BPC which provides social benefits (also equal to the minimum wage) to 3 million elderly poor and disabled, and the Bolsa Familia programme which provides benefits, albeit meagre, to one-quarter of the population. Fifty-two percent of Brazilian households are now considered to be in the “middle class” — a growth of 22 percent over 2004. The increase in incomes of the poor and middle classes has fuelled domestic demand, and because Brazil still has an important manufacturing base (despite liberalization in the 1990s), the growth in consumer demand has benefitted the economy and spurred job creation.
Brazil has also benefitted from a decline in the number of youths in the population due to demographic transition as well as the expansion in secondary education that has helped to keep adolescents in school and out of the labour force. There also have been a number of micro-level interventions that have aided formal job creation. Small businesses can more easily register their businesses and their taxes have been lowered and with the expansion of credit in the economy (albeit at high interest rates) there is more of an incentive to be formal.
The ratio of labour inspectors to employed population is half of ILO standards, but there have been improvements in the way inspection is undertaken and increases in the number of workers formalized as a result of inspection (see the work of Roberto Pires and Mansueto Almeida of IPEA for a discussion of improvements in inspection).
Finally, there seems to be greater legal awareness and thus more claims made for a respect of rights among some workers that have typically been excluded. Here, I refer to the case of domestic workers. While only 27 percent have formal labour contracts now, at the beginning of the 1990s, only 19 percent did. One of every six women in Brazil is employed as a domestic worker, but until the Constitution of 1988 they had practically no rights. An active union and the media attention received by a number of labour courts cases in which domestics sued former employers have helped to change attitudes and behaviour. There is still a long way to go, but progress is being made.
The experience of Brazil in the 2000s — in contrast with the 1990s — demonstrates the profound role of government policy in ensuring that workers reap the gains from economic growth. It shows the importance of pursuing domestic-demand-led growth, how wage policies contribute to fuelling demand (and how wage increases can create jobs), the importance of a social safety net, how micro-level policy interventions are also needed, and how a labour force more educated about its rights can help to alter behaviour. Formal workers in Brazil enjoy important benefits and protections — pension, sickness, disability and death benefits, paid annual leave, parental leave, restrictions on working hours and a guaranteed minimum wage — that informal workers are not guaranteed and must continuously negotiate with their employers if and when they are granted. Even then, they are excluded from social security benefits, which in the case of sickness, disability or death can easily bring about financial ruin in families. It is thus extremely welcome that the economy is creating jobs and that the majority of these jobs are formal.
Janine Berg works for the International Labor Organization in Brazil. You can read more about the recent rise of formality in Brazil in her ILO report, Laws or Luck?: Understanding Rising Formality in Brazil in the 2000s. This article was first published in TripleCrisis on 4 October 2010; it is reproduced here for non-profit educational purposes.