Brazil in 1999: The Impact of Rigid Labor Regulations

By Jennifer P. Poole and Rita Almeida*

The outside of a building in Brasilia, Brazil

Brazil’s Ministry of Labor and Employment in Brasília. / Grupo Vestcon / Creative Commons

During Brazil’s currency crisis and devaluation in 1999, stringent implementation of labor regulations hindered, rather than enhanced, manufacturing plants’ recovery and workers’ wellbeing – an important lesson to keep in mind in current debates in many countries.  In an article published in the May 2017 Journal of Development Economics (JDE), we examine the implications of global economic integration through international trade on local labor markets during that critical period in 1999.

  • Many economic policymakers agree that reforms in the latter half of the 20th century, such as liberalizing trade relations and encouraging foreign investment, have been powerful drivers of efficiency gains, income growth, and consumer choice around the globe. At the same time, however, there is agreement that – as firms adapt to a more competitive global environment – the gains are often accompanied by short-term costs for workers in terms of unemployment and income risk.  Policymakers have to weigh the broad economic benefits from globalization and technological change, on the one hand, against workers’ opportunities and security on the other.

A micro-econometric estimation analysis of detailed, confidential, and proprietary micro-data sets – collected in part while visiting the Brazilian Labor Ministry – reveals a causal impact of trade reform on employment.  Brazil’s policy environment of strict labor market regulations (e.g., hiring and firing costs), coupled with its dramatic trade liberalization and currency devaluation, make it a particularly appropriate setting to study the implications of globalization on employment opportunities in a middle-income country.  As in many countries, much of the de jure labor market framework was established on a national basis in Brazil (in the Brazilian Federal Constitution of 1988), but de facto labor regulations – the varying levels of implementation through labor inspections, fines, and other processes in different locales – are heterogeneous.

  • Administrative data on the enforcement of labor regulations during the 1999 currency crisis, a shock to trade openness, show that the way trade affects employment largely depends on the stringency of de facto labor regulations that companies face. The impact of the currency devaluation – widely predicted to expand employment by facilitating access to foreign markets and weakening import competition – was less significant in plants facing strong labor enforcement than in those facing more lax enforcement.  The findings suggest that stringent labor regulations limit job creation and lower productivity gains.
  • Not only was the efficient reallocation of labor in response to shocks inhibited by strict de facto labor market regulations; rigid enforcement also restricted the within-plant potential for productivity gains. The data reveal that regulations, for example, may limit plants’ ability to introduce new goods or investment in more complex production technologies that might have higher value-added.  The burden of having to retain unproductive workers, making plants less able to compete, is another possible explanation for weak productivity gains.

Previous research – arguing that weak enforcement leaves regulations ineffective – ruled out the possibility of labor regulations as an explanation for slow labor adjustment to trade reform.  But our research shows that flexible regulations maximize the gains of reforms such as trade liberalization.  As middle-income countries continue to face a globalizing and technologically advancing world economy, their strict labor market policies, limiting adjustment and reallocation, may have potentially distortive, unintended consequences.  The trade-off between job security, on the one hand, and productivity and growth is already one of the most prominent public policy debates worldwide.  Regulations designed to protect workers may actually further reduce employment as costs increase.  Countries must show flexibility, while enhancing education and training programs, to benefit fully from changes driven by the global economy.  As populist, protectionist policies gain influence in the world, policymakers should know that increasing the flexibility of de jure regulations will allow for increased job creation and thus offer broader access to productivity gains.

March 7, 2018

*Jennifer Poole is Assistant Professor of Economics, School of International Service, and Research Fellow at the IZA Institute of Labor Economics and the CESifo Research Network.  Rita Almeida is a Research Fellow at the World Bank and the IZA Institute of Labor Economics.  Their article is titled “Trade and Labor Reallocation with Heterogeneous Enforcement of Labor Regulations.”

The “Informal City” and Latin America’s Urban Future

By Robert Albro

Embed from Getty Images

Latin American cities are powerful engines for growth, but sustaining that progress will require moving workers from the informal into the formal sector.  Latin America is the most urbanized continent in the world, and its cities are now the region’s main economic engine.  Its ten largest cities account for about half of the region’s economic output, and their share of economic activity is projected to increase by 2025.  They are also increasingly aspiring to insertion in the global economy. And mayors often assume a CEO-like autonomy in attracting international capital, business, and talent to their cities, while pursuing policies designed to enhance their municipal standing as critical global nodes, hubs or platforms of innovation, manufacturing and services.  Strategies include international city-to-city cooperation, corporate and multinational partnerships to fund infrastructure, global policy forums for mayors to share best practices regarding sustainability or climate change, and new urban planning intended to increase connectedness to global information flows.  Citi and the Wall Street Journal in 2013 judged Medellín, Colombia, the “most innovative city” in the world.  San José, Costa Rica, has become a telemarketing outsourcing center, in large part because of its well-prepared workforce.  And cities like Monterrey, Mexico, and Curitiba, Brazil, are emerging tech hubs.

Over the last several decades, however, rapid urban growth in Latin America has also greatly expanded the urban informal sector.  With sub-Saharan Africa, Latin America has the largest informal sector in the world.  Of all workers in greater Bogotá, for example, 59 percent operate in the informal economy.  Low levels of technology, finance and job skills conspire to limit productivity and to distance Latin America from the frontiers of the global economy.  Along with low earnings and the lack of social benefits or income security, a large informal labor sector generates inadequate tax revenue for municipalities and chronic underinvestment and neglect of urban infrastructure.  Pervasive informality also contributes to social exclusion.  More than 80 percent of the top 50 most violent cities in the world are in Latin America, and this violence is concentrated along rapidly expanding urban margins.  In the absence of resources from municipal authorities, marginal urban dwellers turn to illicit actors and activities for unregulated or pirated services and protection.  Potentially competitive enterprises are hesitant to establish a presence in cities where property ownership is contested or where government voids leave land, money, governance and other resources, vulnerable to criminal capture.

Latin America’s cities aspire to effective insertion into the global economy while also struggling with very local and hard-to-change challenges of informality and unregulated urban growth.  Labor flexibilization and privatization, hallmarks of 1990s-era neoliberal policies, at once promote the growth of the informal economy and complicate urban planning intended to facilitate the development of assets necessary for global competitiveness.  Urban planners mistakenly continue to treat participants in the informal economy as a transient reserve army of labor composed of rural in-migrants not yet absorbed into the industrial sector.  Yet if cities want to develop their niche in the global economy, policy makers will also have to attend to the connections between urban informality and social exclusion. Large-scale and violent protests, such as last year’s flash mob protests in shopping malls by working-class Brazilian youth, are demanding their “right to the city.” The economic future and competitiveness of Latin America’s cities significantly depends upon their capacity to address the second-class citizenship of their informal workforce. Overcoming social exclusion is a first step to competing effectively in a global economy characterized by increasingly stiff competition among cities.

Social Exclusion and Societal Violence: The Household Dimension

By Juan Pablo Pérez Sáinz*

A street in Pacuare, Costa Rica—one of the FLACSO project's research sites  Photo credit: d.kele | Foter | CC BY-NC-SA

A street in Pacuare, Costa Rica—one of the FLACSO project’s research sites
Photo credit: d.kele | Foter | CC BY-NC-SA

Ongoing research in Central America increasingly points to citizens’ exclusion from basic markets, especially the workforce that receives certain social guarantees, as the cause of societal violence in the region.  Their lack of access to the labor, capital, land and other markets, in which almost all income is generated, leads to an extreme disempowerment – a primary exclusion – that reverberates through citizens’ lives.  Analysts of Latin American societies often focus on poverty and income inequality as important elements in violence, but a study by FLACSO-Costa Rica and FLACSO-El Salvador indicates that social exclusion is the underlying cause of these problems and, therefore, is the more reliable indicator of a country’s vulnerability to societal violence.  The processes of social exclusion may be responsible for the epidemic of violence that plagues urban spaces across the isthmus and elsewhere in Latin America.

In Central America, labor markets are increasingly important drivers of primary exclusion.  These are societies riven by endemic unemployment and generalized job precariousness, and much of the population is relegated to the kinds of self-employment that offer no prospects of ever moving beyond satisfying the survival imperatives of households.  Numerous South American governments in recent years have helped neutralize citizens’ exclusion through carefully designed social programs, but when the state lacks the capacity or will to supply access to such “citizenship,” as has been the case in much of Central America, exclusion only deepens.  A least two basic narratives establish clear linkages between social exclusion and violence, especially among youth.

  • First, when the state abandons marginal urban territories, these fall under the control of youth gangs that establish themselves as new authorities and obtain a monopoly on the instruments of violence.
  • Second, precarious employment – the inability of citizens to generate incomes sufficient to satisfy minimal aspirations of consumption – leads to lifestyles in which the line between legal and illegal becomes murky.

FLACSO’s study of several urban communities in Costa Rica and El Salvador has identified a possible third link between social exclusion and violence – in the household.  The domestic sphere, typically glorified as the sole space of security amidst the external insecurity that these communities find in public spaces, can also become a source of exclusion-driven violence.  Male unemployment, especially that of heads of household, is expressed not only in violence among adults but also violence by adults against children.  That violence in turn is projected outward, toward other members of the community, as victims of violence within households become perpetrators of violence outside them.  The complex chain of different types of violence, beginning with the structural violence that society generates through social exclusion, passing through the household unit, and then rebounds outward toward the community.  If this is in fact what is occurring, it suggests that efforts to overcome primary exclusion are imperative to reduce all levels of violence.

*Juan Pablo Pérez Sáinz is a senior researcher for the Latin American Social Science Faculty in San José (FLACSO-Costa Rica) and lead researcher in this project supported by the IDRC.  For a description of the project please click here.