How Brazil (and Latin America) Can Preserve Job Growth

Co-authored by Joana Silva.

As the boom years fade away, Latin Americans are beginning to wonder if they should be worrying about losing the wage and job gains achieved over the past decade or so.

To answer them, two key questions first need to be addressed:

Is a large part of the job and wage gains of the new millennium at risk of reversal in the current economic slowdown? If smart change is what it takes to address this potential threat, what needs to change?

Let's try to answer using Brazil as reference. Why Brazil? Because it is Latin America's largest economy, has significantly expanded the average level of education of its labor force (average years of schooling increased by 50% over a decade), it experienced major gains in average wages and employment, and invested significantly in social policy.

Over the past 15 years, Brazil has created 19 million new formal jobs, the economy went into a rather prolonged period of full employment, and the quality of employment improved because on average wage gains were large and highest among poor workers.

This explosive job growth dominated the Brazilian economic scene until around 2012, and was the main driver of reductions in poverty and income inequality.

Since then, however, labor markets have started weakening and by now the unemployment rate in Brazil is back to 2009 levels, informal employment is on the rise, participation in the labor force is declining, and wage growth among unskilled workers is starting to stagnate.

To make matters more difficult, economic adjustments to the adverse and persistent change in external conditions (the slowdown in China and declining commodity prices) have not yet been completed. This means that economic stagnation and pain in the labor markets are still very much on the cards.

Brazil needs to act fast in order to preserve social progress and ensure that the poor are not left behind. Policy attention should urgently focus on two key goals: raising labor productivity, and better connecting the poor with more productive jobs. This, in a nutshell, is the diagnosis of the new World Bank report "Sustaining Employment and Wage Gains in Brazil"

The following comparisons can provide and idea of the challenges and opportunities facing Brazil:

• East Asia vs. Brazil: Korea has increased its labor productivity ten-fold since the 1960s while Brazil has only doubled it. China took just 15 years to closely reach Brazil's average level of labor productivity. Meanwhile, real wages in Brazil grew by about 38 percent since 2005, well in excess of labor productivity, which inched upwards by just 12 percent. The increasing gap between these two aggregates is in stark contrast to trends in the G-20. Brazil needs to address the challenge of its labor productivity to preserve and sustain wage gains.
• 2010 vs. 2014: In 2010, Brazil was creating more than 2.5 million formal jobs per year; by 2014 it was creating around half a million (less than the expansion of the working age population). Most of those positions were created by new small firms or new small branches of older and larger firms. Mid-size firms did not participate strongly in the job creation process. The lack of vigorous growth among surviving firms represents an important challenge to sustaining good job creation in Brazil.
• Formal vs. Informal: The share of the poor in formal jobs grew from 10.5 percent in 2008 to 16 percent in 2011, an expansion mostly concentrated among young adults who have completed high school, many of whom come from families supported by Brazil's flagship conditional cash transfer program Bolsa Familia, a program that covers 25 percent of the population and yet costs less than 1 percent of GDP. However, in times of lower growth and weaker labor markets, the poor's lower skills, education and assets for investment make them more vulnerable to job loss. This links labor market performance to poverty, and represents a major challenge for a Brazil in times of fiscal constraints.

By and large, Brazil's job-creation story during the boom repeated itself throughout Latin America, especially in commodity-exporting South America, although the pace of formal jobs creation was faster in Brazil.

Now, with the slowdown, the challenges they all face are similar. Large social and economic gains of the past decade may be at risk as most South American countries adjust to a new normal of lower growth. Differences between countries lie, however, in the scope of the needed adjustment and the type of instruments available, as reported in "Jobs, Wages and Latin America Slowdown". Overlapping situations across countries may include stagnating employment rates, decaying quality of employment, and an increasing share of workers leaving the labor force.

These patterns translate into lower income for poorer families, putting additional pressures on social safety nets and job intermediation services.

This brings us to address the second initial question. What policy approaches may help deal with these common challenges?

1) Data, data, data. We need to better capture the results of policies and programs on labor market outcomes (such as job entry and wage returns) through strengthened information systems. Such data can be used to re-focus management of programs on results. Based on the evidence thus obtained, only the most successful programs will be expanded and those that don't succeed, reevaluated.

2) Don't train for jobs that don't exist. Training programs need to be aligned with the demands of the private sector. They should develop the skills required by employers and include training in socio-emotional skills, promote better technical preparation of trainers, and provide students with professional career guidance. Training should be better linked with job intermediation, entrepreneurship support, internships and hands-on experience.

3) Make it work for the poor. Existing employment programs should be connected and adapted to the needs of the poorest. Rather than creating new programs, existing ones can be made more inclusive and better integrated. Adding flexibility and access to supporting services, especially for working mothers will promote labor force participation. Access to credit and technology for small farmers and micro-entrepreneurs needs to improve and financial support combined with nonfinancial help (technical assistance on business plans, for instance).

All of this requires short- as well as long-term commitments. Yet, to be sure, labor market policies and investment in skills development alone are not sufficient for addressing the recent job losses. Improvements in the business climate, competitivity policies, financial services, and the expansion of international trade are critical to ensure a return to growth and job creation.