Firing fever hits our economy

In a global economy with companies looking closer at the
bottom line jobs have been the main casualty. For Brazil as for the rest
of the capitalistic word the challenge has been how to create new jobs
to counterbalance the inevitable downsizing of some businesses.

Carlos Emmanuel da Fonseca Barreto

AT&T recently announced the laying off of 40,000 employees in a
reorganization plan to decrease costs. The process of globalization that
the world is experiencing has pushed companies to trim their work force
to become more competitive. Nowadays, this reduction in employment has
been associated with countries embracing free market policies and unemployment
haunts every economy on the face of the earth, in both developed and developing
countries. According to Henry Farber, an economist at Princeton University,
employment stability fell from 10% to 20% for workers between the ages
of 45 and 54.

Job insecurity is not just for factory floor workers anymore. Executives
and all kinds of white collar workers are having to deal with the problem.
The vulnerability of these high level workers has echoed to the government
machine, and pressured politicians to look at the laws governing business
and adjust to the new economic environment in their countries. But how
much can an association between globalization and international competition,
and low employment be held in balance?

The great majority of economists believe that free market policies shift
the labor force from one sector to another and that high levels of unemployment
reflect the government’s inability to deal with economic changes. Argentina,
starting in 1991, opened its economy to the world and last year reached
a record unemployment rate of 14%. In 1995, 400 thousand Brazilians lost
their jobs, the largest number in five years. However, statistical figures
showed that during the same period, the average income rose 20.3%, which
means that job loss doesn’t mean unemployment but a lack of formal contracts.

Brazil, with similar policies of economic openness as those adopted
by Argentina, has not suffered from profound structural unemployment. The
cause of this low unemployment rate is the informal economy which generates
millions more jobs than the formal sector. A recent study by IBGE (Brazilian
Institute of Geographic Statistics) has shown that 55% of the Brazilian
work force does not have contracts. How can firms support a business laws
that do not reach half of the country’s work force?

In January, an accord achieved between the Metalworkers Union and eight
groups of industries in the FIESP (Săo Paulo State Industrial Federation)
marked the turning point in the dominance of the Brazilian market. The
accord promulgates a balance between payroll deductions and workers rights:
temporary contracts with lower social assessments. For example, a firm
would hire 85 new employees under the new contract while through legal
means they could only afford 74 employees. Under current law, the difference
in 11 employees’ salaries would be consumed in social contribution.

President Fernando Henrique Cardoso says that the accord was very positive
because the idea came from workers. Nevertheless, the agreement ended up
being suspended due to legislative constraints and because of claims that
it would favor firms that withhold taxes. According to Congressman Roberto
Campos, the laws should adapt to the economy and not the other way around.

Brazil has one of the highest costs of production in the world which
is constantly emphasized by the expression “Custo Brasil” (Brazil’s
Cost). Furthermore, the social responsibility burden represents the highest
cost to this Custo Brasil and it creates impediments to economic development.
To create more jobs, companies need greater amounts of capital to invest
in new plants.

The open door policy may cause high levels of unemployment and in order
to fight that corollary, the country must adopt strong political commitments
to create new jobs. These commitments are incentives to sectors which absorb
a greater contingent of the working force (i.e., construction and tourism)
and a reform to the labor legislature.

In construction, high interest rates impede financing of residential
units because the Real stabilization plan requires high interest rates
to control consumer spending. Further, the public deficit undermines new
infrastructure projects because to balance the budget the government must
privatize state-owned enterprises and cut government spending. Therefore,
the creation of new jobs through incentives for construction seems difficult
to achieve. Along those lines, incentives for tourism depends on a very
important factor: fighting crime. Brazil is one of the few countries in
the world that has been losing international tourists due to mounting crime

Labor Minister Paulo Paiva has committed his term in office to the creation
of a new law that institutes temporary working contracts. The project being
drafted is intended to combat the informal sector as well as unemployment.
Mr. Paiva promises that companies will spend less on social assessments
including dismissal charges. The temporary contract will allow for periods
of up to two years and it will be available to 20% of the firm’s total
employees. Furthermore, no employee may work more than 120 extra hours
per year.

The accidental insurance, the educational salary, and the contributions
to SENAC (National Service for Commercial Apprenticeship), SENAI (National
Service for Industrial Apprenticeship), and SEBRAE (Brazilian Service to
Medium and Small Enterprises) will have a 10% deduction. The FGTS (Guaranteed
Retirement Fund for Time of Service) falls from the present 8% to a 2%
level. Moreover, in lay-offs, the employer will not have to give severance
pay nor pay the usual 40% penalty to the FGTS.

The project is unprecedented in Brazilian history, especially in that
it has been consented to by firms and unions. Congressional approval is
required to institute the new legislation and lobbies have been pressuring
politicians to pass the amendment which is scheduled to go into the plenary
assembly in the coming months.

The long-needed labor reform will boost investments from firms that
have not pursued it due to the constraint of the present social contributions.
This in turn should lead to increasing job offers and a decline in the
unemployment rate. It might prove that the so-called liberal economists
are after all correct when they say that free market policies require government
adjustments to the new economic environment.


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