Brazil: Labour Market is Strong, but There Still Some Slack

Figure 1: Unemployed Rate and Employed People

Source: PNAD/IBGE

Since the onset of the pandemic, Brazil has demonstrated a robust employment recovery, with the unemployment rates plummeting to 8%—a figure reminiscent of the period prior to the 2015-16 crisis. Current occupation levels have reached record highs, and the creation of formal jobs continues to exhibit signs of sustained vigour, albeit with a recent deceleration. While these indicators might suggest a potential tightness in the labor market, our assessment argues otherwise, at least for the time being.

Occupational levels have only managed to ascend by a modest 3% above those observed during the fourth quarter of 2019. Notably, approximately 80% of the newly established positions are concentrated within the IT Sector and the Public Administration sector. The former aligns with the post-pandemic shift toward technology-driven fields, while the latter responds to the heightened demands for public services, necessitating an augmented government workforce to address the aftermath of the pandemic. A more comprehensive surge across all sectors remains elusive, as most industries hover just slightly above their pre-pandemic occupation levels.

Figure 2: Net Jobs Creation since Q4-2019 (Thousands)

Source: PNAD/IBGE

The conspicuous reduction in unemployment figures is largely attributed to a considerable segment of the population exiting the labor force. Between 2012-2019, labor force participation has maintained an average of around 63.5% among individuals aged 14 and above. However, this metric has receded to 61% in the second quarter of 2023. This shift could be ascribed to an aging population or the resignation of certain individuals from active job-seeking endeavours. In an alternate analysis, where we uphold the labor force participation rate at 63.5%, the second quarter unemployment rate would stand at 10.8% (Figure 3), resembling the figure observed in the fourth quarter of 2019.

Figure 3: Unemployment Rate under the Alternative Scenario (%)

Source: PNAD/IBGE and Continuum Economics

Moreover, the inflationary pressures witnessed prior to the pandemic have yet to materialize into significant wage advancements. Real wages persist in their lagging behaviour, remaining 1% below the benchmarks established during the first quarter of 2020 (Figure 4). Ordinarily, a tight labor market would ignite wage expansion that outpaces inflation, thereby heightening demand and consequentially fostering inflationary tendencies. Even in the scenario of a substantial surge in job creation, the substantial pool of unemployed individuals (9 million) and the potential re-entry of those who recently exited the labor force could recalibrate the supply and demand equilibrium within the labor market. This, in turn, could mitigate any further escalation in wage growth.

Figure 4: Average Real Wage (BRL)

Source: PNAD/IBGE

While the comprehensive social assistance initiatives enacted during the latter part of Bolsonaro's term, coupled with an enhanced version of the Bolsa Família program, hold the potential to bolster consumption, our analysis suggests that demand pressures will be constrained by the monetary policy framework and wage inflation will present moderate numbers in the coming quarters. Consequently, addressing residual inflationary momentum and the potential reverberations of oil-related shocks represent the final phase in the Brazilian Central Bank's endeavour to steer inflation back towards its target.