Solution and problem: informality should drive recovery in Brazil

RIO DE JANEIRO, BRAZIL – One of the most representative symptoms of the dysfunctions of Brazilian capitalism is the high number of informal workers.

As soon as the novel coronavirus pandemic hit the country and the government launched the first measures to tackle its economic damage, Economy Minister Paulo Guedes and President Jair Bolsonaro began to repeat that the country had found about 40 million invisible people.

These are Brazilians who make up the labor force with no ties to formal companies or access to social security networks. They were precisely the ones most in need of financial assistance, which came in the form of emergency aid.

This newly discovered population by the government has grown in recent years, as a legacy of the recession that ran until 2016. But now, from a major issue that needed to be solved by creating better jobs, they have begun to be perceived as part of the solution to Brazil’s economic recovery.

After all, they were the ones who suffered most from the impact of the pandemic, and they are the ones who can react most quickly to a sign that the worst is behind us.

A special feature of the recession triggered by Covid-19 compared to all past ones was that the informal sector was much more affected than the formal sector, as isolation measures ultimately undermined their business. In past crises, workers with regular employment lost their jobs and income, while informal workers continued their activities.

An analysis by the Brazilian Institute of Economics of the Getúlio Vargas Foundation (FGV-Ibre), based on data from IBGE’s PNAD Continuous Household Survey, shows that at the worst moment of the crisis, in June 2020, the drop in occupation in the informal sector was 20% less than before the pandemic. In the formal sector, the deepest drop was 11%. By the very nature of informal work, however, these first workers may bounce back more quickly.

In January this year, after months in which the pandemic was receding in Brazil and when the second wave of infections was still starting to accelerate, the difference in occupation between the two sectors had been greatly reduced: there were 7.4% fewer formal jobs in relation to the pre-pandemic, against 9.6% for informal.

If this trend accelerates again as the second wave subsides, the total number of unemployed – which reached 14.4 million in February this year, the highest level since official records began – will tend to slow down. “The pre-pandemic gives us a good clue about the future. The recovery from the 2016 crisis was through informality and the conditions will be similar,” explains economist Fernando Veloso, from FGV/IBRE.

This also explains why Guedes has in recent months advocated that the informal sector should be prioritized for vaccination.

While the late and bureaucratic labor legislation discouraged companies from firing during the pandemic, they now prevent a quick resumption of formal employment. Even more so in a scenario of political and fiscal instability and low productivity.

“The low confidence causes the business community to postpone investments and formal hiring,” he points out.

Workers without a signed work book will help in the short term recovery, but for Brazil to truly move towards a more modern and desired future, it will take more than that. Informal workers do not pay taxes or social security contributions – while requiring social protection policies, which may lead to a kind of minimum income program after the end of the emergency aid and requalification plans.

But without tackling the fiscal scenario, the Brazilian economy will not reach the productivity levels needed to formalize people on a high scale. “It’s a bit like taking sand to the beach, but it’s not just rhetoric: the solution lies in reforms,” points out economist Helio Zylberstajn, senior professor at FEA/USP.

Combined with vaccination, the reduction of the state, tax simplification and the attraction of private investment pledged by the administrative and tax reforms and privatizations are the best employment policy for Brazil.