Depec Highlight - Bradesco

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1 Depec Highlight - Bradesco November 16, 2017 Informal sector is the main driver behind the recovery of employment in the Center-South of Brazil Ana Maria Bonomi Barufi The labor market has staged a recovery in recent months, mainly due to the creation of informal jobs (i.e., those held by unregistered or self-employed workers, who do not contribute to social security). The regional breakdown of this dynamic shows that labor market composition varies widely from state to state. Looking at the second-quarter results, the states of Sergipe, Pará, Amapá, Amazonas and Mato Grosso can be listed as positive highlights in terms of lowering the unemployment rate (the latter had already enjoyed a positive dynamic in the previous quarters). Meanwhile, the dynamic is still quite negative in the states of Pernambuco, Piauí, Rio de Janeiro, Roraima, Rondônia and Alagoas. Chart 1 Change in unemployment rate (in p.p.) quarterly and average for the past 4 quarters (2Q17) Increase on the margin, Quarter-to-quarter change -3,0 Increase on the margin and for the year 1,5 1,0-2,0-1,0 0,5 0,0 0,0-0,5 North Northeast Southeast South Center-West -1,0 Average change for the past 4 quarters -1,5 1,0 2,0 3,0 up for the year The breakdowns by sector and type of employment are two of the main structural factors that determine how the local economy responds to changes in macroeconomic conditions. Overall, investment conditions are improving on the back of falling interest rates, controlled inflation, increased confidence in the country s outlook both at home and abroad, and signs that the economy is already starting to adjust to a path of sustained economic growth. At the current stage of the economic cycle 1, with the economy coming out of a recession, food and beverage and healthcare sectors have continued to perform well. In addition, sectors associated with a rebound in infrastructure investment (energy, for example), growth of the consumer credit market (real estate) and changes in disposable income (automobile and clothing, for example) begin to show signs of improvement. Several government-owned companies have been hit hard by a particularly difficult fiscal situation, and in some states such as Rio de Janeiro, Pernambuco, Minas Gerais and Rio Grande do Sul, the government is struggling to pay its employees and make investments. 1 See, for example, Macroeconomic Research Department 1

2 Pernambuco Ceará Maranhão Rio Grande do Norte Tocantins Alagoas Roraima Mato Grosso do Sul Amapá Piauí Rio de Janeiro Distrito Federal Santa Catarina Rondônia Amazonas Acre Bahia Mato Grosso Rio Grande do Sul Espírito Santo Paraíba Paraná Sergipe Minas Gerais Goiás São Paulo Pará in thousands DEC Highlight Bradesco When it comes to employment growth, the regional highlights are a bit different. In many states, job creation is already greater than the drop in the unemployment rate, since it is concomitant with many people returning to the labor force and looking for jobs. Employment has already been growing consistently over the past year (and accelerated in the past quarter) in the states of Acre, Espírito Santo e Goiás. In addition, the South region and the states of Amapá, Federal District and São Paulo have also been recording positive employment growth rates for some time now. Lately, this recovery trend has also spread to Pará, Sergipe, Paraíba and Mato Grosso. Chart 2 Change in employment rate (in %) quarterly and average for the past 4 quarters (2Q17) Quarter-to-quarter change Increase on the margin, 7,0% 3,5% Increase on the margin and for the year North Northeast Southeast South Center-West Average change for the past 4 quarters 0,0% -2,5% -1,5% -0,5% 0,5% 1,5% 2,5% -3,5% Seasonally adjusted data. -7,0% up for the year In absolute terms, some states stand out positively due to their size, even though the percentage change of the employment rate remains low. This group includes the states of São Paulo, Minas Gerais, Paraná, Rio Grande do Sul and Bahia. Meanwhile Acre, Sergipe and Pará recorded the greatest single-quarter percentage change for the employment rate. We should also note the negative dynamic of some Northeastern states (Pernambuco, Ceará, Maranhão and Rio Grande do Norte). Título do Gráfico Chart 3 Change in employment rate (% and absolute) quarterly (2Q17) Absolute change % change 5,8% 5,8% 7,0% 5,0% - - 1,8% 1,4% 1,0% 1,0% 0,6% 0,6% 0,2% 0,1% 0,4% -0,3% -0,6%-0,7% -1,2% -1,0% -1,9% 2,4% 2,9% 1,8% 0,9% 0,4% 0,5% 3,8% 2,5% 0,5% 0,4% 3,0% 1,0% -1,0% -3,0% 0-5,0% *Quarterly change of seasonally adjusted data. Macroeconomic Research Department 2

3 DEC Highlight Bradesco The main factors affecting these regional dynamics emerge from a more detailed analysis of employment data. First, some states have a larger share of their workforce in informal sector jobs (i.e., those held by unregistered or self-employed workers, who do not contribute to social security 2 ), especially in the Northeast. On the other hand, states in the South and Southeast regions, and the Federal District (), have a larger number of individuals who are employers or work in registered jobs. Increased informality in the labor market may be associated with the economy s quick adjustment to the economic cycle. However, these economies end up being less diversified and therefore less resilient. The public sector accounts for a large share of jobs in Amapá, Roraima, Federal District, Tocantins, Acre and Paraíba. Such a strong presence from the public sector could help these states keep the unemployment rate more under control. At the same time, this level of dependence on the public sector may lead to a sluggish local economy at times of reduced public investment. Finally, the states with the highest unemployment rates are in the Northeast (Bahia, Pernambuco and Alagoas), as well as Paraíba, Amapá and Rio de Janeiro. As noted above, some of these states continue to face more negative unemployment rate dynamics (Pernambuco, Alagoas and Rio de Janeiro). Figure 1 Informal jobs rate, % of workers in the public sector and unemployment rate, 2Q17 Informal Jobs rate 2Q17 % of workers in the public sector 2Q17 Unemployment rate 2Q17 * Seasonally adjusted data. 2 Distinction made between self-employed individuals who contribute to social security and those who don t. The first group can be classified as more formal, or at least more stable, since work conditions allows its members to pay into social security. Therefore, this text refers specifically to unregistered or self-employed workers who do not contribute to social security. Macroeconomic Research Department 3

4 Pernambuco Ceará Maranhão Rio Grande do Norte Tocantins Alagoas Roraima Mato Grosso do Sul Amapá Piauí Rio de Janeiro Distrito Federal Santa Catarina Rondônia Amazonas Acre Bahia Mato Grosso Rio Grande do Sul Espírito Santo Paraíba Paraná Sergipe Minas Gerais Goiás São Paulo Pará DEC Highlight Bradesco In the second quarter of 2017, the informal sector was the main driver of net job creation. If we rank all Brazilian states by the absolute change in the number of employed individuals (as seen in Chart 3), we find that even those states with smaller informal sectors saw a significant increase in this type of employment (especially São Paulo). Meanwhile, growth remained sluggish for formal employment. Even states with a positive job growth saw a decrease in formal emprego formal jobs. We also found a similar trend for self-employed workers who pay into social security. In fact, it s possible that some workers in this group are being replaced with self-employed workers who do not contribute to social security. When it came to São Paulo, however, the sum of both groups was still negative for the period under review. Chart 4 (Absolute) change in number of employed individuals, by type of employment quarterly (2Q17) 1 Conta Self-employed própria sem workers INSS who do not emprego contribute 70 formal to social security 5,3 1,5 5,3 10-7,3-4,6-3, ,3-43,7-2,8 22,6 87,0 10,0 3,7 15,7-4,1 5,8-7,0 2,5 56,8 52,9 52,1 48,9 19,4 14,2 21,8 32,1 31, Empregados Unregistered sem workers carteira emprego formal,6-3,0 26,1 5,7-0,3 17,7 0,5-2,4 17,6 4,7 1,9-2,8-24,3 21,2 4,2 3,9 94,8 47,6 35,8 15,7 20,0 19,4 7,0 3,7 17,4 126,6 62,7 1 Self-employed Conta própria com workers INSS who contribute to social security 70 emprego formal 10 0,1 0,5 0,2 5,2 - -3,1-4,6-3,6-7,9-0,8-0,5-12,0 1,5 17,1-5,4 7,1 7,5 13,8 13,2 3,8-0,1-0,2-0,7-0,4-9,3-6,3-3,6-63, Formal Emprego employment formal -29,1-56,7 3,4-5,3 1,4-0,4-5,9-18,8 3,1-16,9-66,4-20,5-5,5-0,1-8,9 25,4 6,3 9,7 2,7 9,3 14,8-13,4-21,5-27,2-36,7-51,8-45,5 *Quarterly change of seasonally adjusted data. Macroeconomic Research Department 4

5 DEC Highlight Bradesco The labor market dynamics in the states with the highest job growth rates is associated with key industries that may pull the economy out of the current recession. If we look at key industries for job growth in absolute terms, for the states with the most positive change in employment as seen in Chart 4, we find that manufacturing is very important to formal employment growth, leading two of the top five states in change in employment. As for self-employed individuals who contribute to social security, growth was led by the agricultural (possibly due to unique weather conditions that yielded record crops in 2017) and transportation industries. This growth may be associated with a new employment category related to transportation apps, which have become very popular in Brazil s largest cities. For example, one such transportation provider already has more than 0,000 registered drivers. Meanwhile, education and healthcare are significant for informal jobs creation, as is the construction industry in the case of São Paulo. Finally, when it comes to self-employed workers who do no contribute to social security, manufacturing stood out in Pará and Minas Gerais, while construction was responsible for a sharp rise in employment in Rio de Janeiro. Table 1 Industries that contribute most for absolute change in employment, in absolute terms, for each state and employment type (2Q17) FormaL Employment Self-employed, social security Unregistered workers Self-employed, no social security Pará Manufacturing Agricultural Educ. Health Manufacturing São Paulo Manufacturing Transportation Construction Retail Goiás Manufacturing Transportation Educ. Health Construction Minas Gerais Educ. Health Transportation Educ. Health Manufacturing Sergipe Manufacturing Manufacturing Household Serv. Construction Paraná Manufacturing Construction Agricultural Transportation Paraíba Retail Transportation Educ. Health Agricultural Espírito Santo Retail Other Services Household Serv. Other Services Rio Grande do Sul Transportation Agricultural Manufacturing Retail Mato Grosso Lodging & Food Financ., Real Est. Lodging & Food Retail Bahia Manufacturing Educ. Health Educ. Health Retail Acre Agricultural Retail Household Serv. Agricultural Amazonas Educ. Health Financ., Real Est. Educ. Health Financ., Real Est. Rondônia Retail Transportation Transportation Retail Santa Catarina Transportation Retail Educ. Health Other Services Distrito Federal Manufacturing Educ. Health Educ. Health Agricultural Rio de Janeiro Public Adm. Retail Retail Construction Piauí Educ. Health Transportation Household Serv. Agricultural Amapá Public Adm. Agricultural Educ. Health Financ., Real Est. Mato Grosso do Sul Agricultural Retail Educ. Health Other Services Roraima Educ. Health Lodging & Food Retail Retail Alagoas Household Serv. Lodging & Food Agricultural Construction Tocantins Public Adm. Construction Public Adm. Transportation Rio Grande do Norte Financ., Real Est. Retail Retail Lodging & Food Maranhão Public Adm. Retail Educ. Health Manufacturing Ceará Retail Construction Manufacturing Financ., Real Est. Pernambuco Construction Manufacturing Manufacturing Lodging & Food Note 1: In red, states with the most positive change in employment, as per Chart 4 Note 2: Quarterly change of seasonally adjusted data. Note 3: Industries: Agricultural farming, livestock, forestry, fishing and aquaculture; Manufacturing General manufacturing; Construction Construction; Retail Retail, motor vehicle repair; Transportation Transportation, storage and parcel shipping; Lodging Lodging and food; Real estate financing Information, communication and financial, real estate, professional and administrative activities; Public administration Public administration, defense and social security; Education and health Education, human health and social services; Other services Other services; Household services Household services. Macroeconomic Research Department 5

6 DEC Highlight Bradesco In general, manufacturing is more associated with formal employment, while retail, education and healthcare, agriculture, and part of manufacturing in some states are associated with more informal jobs. Household services only stand out for informal jobs created in the states of Sergipe, Piauí and Espírito Santo. Likewise, most of the jobs created by the education and health industries were off the books. Construction, which has been a stronger driver to job creation in the past, is currently contributing less due to the stage of the economic cycle, the early stage of credit recovery, tighter conditions for government-subsidized loans and the still difficult situation of several builders and developers. Nonetheless, it was one of the main contributors to an increase in the number of self-employed individuals who do not contribute to social security. Meanwhile, transportation apps have driven an increase the number of self-employed individuals who pay into social security. These tend to be more skilled workers who are driving on a temporary basis and try to keep making their contributions. However, this industry was not able to fully offset the number of jobs lost in other industries that rely on this type of employment. In sum, the regional dynamics of the labor market suggest that the country s jobs recovery is still concentrated in specific regions. That is due to the fiscal situation of some states (Rio de Janeiro, Pernambuco) or the low complexity of the production infrastructure in other states, which makes them depend primarily on the public sector and the recovery of confidence and consumption, with a general improvement in income (Maranhão, Ceará and Rio Grande do Norte, among others). The states that have seen a more steady recovery in the labor market are in the Center-South region, because they have a more diversified economy and a strong agribusiness industry, which has not been hit hard by the crisis. Informal employment has played an important in this early recovery of the labor market. This phenomenon was already evident in the aggregate economic data, but a regional breakdown suggests that even those states that have seen a recovery in employment have done so primarily by hiring unregistered and self-employed workers who do not contribute to social security. Therefore, states with a more diversified economy end up being better equipped to climb out of the recession. This recovery is expected to spread to other states, even if states that are more reliant on the public sector may struggle somewhat. Over the long term, government spending cuts are expected to have a positive overall effect on the economy, as they will allow for more favorable conditions for economic growth. As for the reforms implemented by the government so far, the labor reform that loosened labor laws labor is expected to allow the economy to adjust faster to the recession, with more adequate hiring conditions than those provided by informal employment. In addition, the pending pension reform could help states keep their personnel costs down (which is associated with aging of the population). Macroeconomic Research Department 6

7 DEC Highlight Bradesco Technical Staff Director of Economic Research and Studies Economists Fernando Honorato Barbosa Ana Maria Bonomi Barufi / Andréa Bastos Damico / Constantin Jancso / Daniela Cunha de Lima / Ellen Regina Steter / Estevão Augusto Oller Scripilliti / Fabiana D Atri / Igor Velecico / Leandro Câmara Negrão / Marcio Aldred Gregory / Myriã Tatiany Neves Bast / Priscila Pacheco Trigo / Regina Helena Couto Silva / Thomas Henrique Schreurs Pires Interns Alexandre Stiubiener Himmestein / Camila Medeiros Tanomaru / Felipe Yamamoto Ricardo da Silva / Mariana Silva de Freitas / Rafael Martins Murrer / Thaís Rodrigues da Silva economiaemdia.com.br DEC BRADEO is not responsible for any acts/decisions taken on the basis of the information available through its publications and projections. All data or opinions contained in the information herein is carefully checked and prepared by fully qualified professionals, but should not be taken, under any circumstances, as a basis, support, guidance or standard for any document, assessment, judgment or decision-making, of a formal or informal nature. Thus, we emphasize that all consequences and responsibility for the use of any data or analysis of this publication are assumed solely by the user, exempting BRADEO from all actions resulting from the use of this material. We also point out that access to this information implies acceptance of this term of responsibility and usage. The total or partial reproduction of this publication is strictly prohibited, except with authorization from Banco BRADEO or full citation of the source (naming of the authors, the publication and Banco BRADEO). Macroeconomic Research Department 7