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Friday, June 22, 2007

Unemployment in Brazil

The contents of this Bloomberg article this morning makes the role of the demographic component in sustainable economic growth pretty clear I feel:

Brazil's unemployment rate was unchanged in May from the previous month as quickening economic growth prompted more people to come into the workforce, offsetting gains in hiring.

Unemployment in Brazil's six largest metropolitan areas was 10.1 percent, the national statistics agency said, higher than the median forecast of 9.9 percent in a Bloomberg survey of 16 economists.

``Unemployed people are looking for jobs as the positive outlook for the economy boosts companies' confidence to spend more on hiring,'' Sandra Utsumi, chief economist with BES Investimentos in Sao Paulo, said in a phone interview. ``Even though the jobless rate didn't drop, the perspective for the labor market is positive as the economy is growing.''

The difference with Germany, Japan etc (or Latvia, Lithuania for that matter) couldn't be clearer. The rate in Brazil doesn't fall dramatically with growth due to the large numbers of younger people who are continuously coming online.

Companies are hiring more as slowing inflation, lower interest rates and rising family incomes encourage consumers to boost their spending, said Utsumi. Market analysts expect the economy to grow 4.25 percent this year and 4 percent in 2008 compared with 3.7 percent in 2006, according to the median estimate a June 15 central bank survey.

Brazil's central bank slashed the benchmark interest rate to 12 percent, a record low, on June 6 from a 19.75 percent in September 2005, as inflation reached the lowest level in eight years.

Meanwhile back in Latvia annual wage inflation is running at 33%.


Anonymous said...

Edward, are you suggesting that Brazil will never make headway on unemployment? I will take that bet, just name the terms.

In this particular case, what happened is that more discouraged workers began looking for jobs and re-entered the labor force.

More generally, don't you think that you might be taking the demography matters argument a bit too far? Fast labor force growth has, in fact, been a hallmark of almost all the rapidly-growing economies of the last forty years. The postulated "demographic dividend" does not have to do with slowing labor force growth, but a falling dependency ratio.

Edward Hugh said...

Hi Noel,

"Edward, are you suggesting that Brazil will never make headway on unemployment?"

No Noel, I am not saying that. Evidently I am not explaining myself very well. According to the shape of the population pyramid a society will either have more, or less workers entering the labour market.

Some societies seem to have too many, and some too few for the actual growth rate they are able to obtain.

Germany, Japan and Italy are increasingly having too few coming online, and hence the unemployment rate is reducing, in part, due to older workers leaving the labour force. Latvia (see this post here) increasingly has too few, as soon will a lot of societies in Eastern Europe and Central Asia (see this post which Claus has just put up on DM).

I am really struck in all this by an old problem which has haunted me since my youth, and which Keynes drew attention to in the Tract on Monetary Reform. According to Keynes at that time (circa 1920) the basic problem facing the UK was to create 250,000 new jobs a year to be able to employ all the young people arriving in the labour market and looking for work. The UK had a very hard time all through the 1920s trying to address this issue. In part this is the problem set of Brazil today. I am optimistic that as Brazil grows this issue will resolve itself, especially since fertility has been falling rapidly, and there will be soon many fewer workers arriving.

But some more "elderly" societies are now increasingly having problems finding anything like the number of appropriate workers they need.

This is a very complex issue, and it is hard to explain and do justice to in a few simple words. I hope you are following the argument so far.

Now one solution to this issue, and it is the one which is most noticeable in say the US, the UK, Ireland and Spain is to leverage immigration, but in order to attract migrants you need:

a) migrant friendly policies (which, for eg Latvia does not have, and which is largely why they have 33% annual wage inflation right now).

b) sufficiently strong GDP and employment growth to attract the migrants.

Again this is a tricky question, and the numbers do seem to be rather sensitive to something or other (yet to be adequately identified, and specified).

"don't you think that you might be taking the demography matters argument a bit too far?"

In a word: No. But then we are all entitled to our opinions. I am simply following my intuitions to see where I arrive. Of course, my intuitions may be misleading me.

Anonymous said...

I worry that you have some blinkers on, Edward. You usually seem to argue not only that demography matters, but that only demography matters.

In fact, you often phrase your arguments in such a way that you seem to be arguing for the dominance of demography even when you are not. Consider the statement: "I am optimistic that as Brazil grows this issue will resolve itself, especially since fertility has been falling rapidly, and there will be soon many fewer workers arriving."

The second clause isn't necessary to the argument. Rather, the second clause makes it seem like you arguing that a falling birthrate is the only way in which Brazil could resolve its unemployment problem.

That is quite obviously untrue, of course, and not what you are arguing. It is odd, however, to see a post about unemployment in Brazil focus on labor force growth when there are multiple more-important culprits for Brazil's unemployment problem. I understand now that you did not mean to ignore them, but that it what it seemed like.

Edward Hugh said...

Hi again,

"I worry that you have some blinkers on"

Well thanks for the concern, but I really don't know what I can do to convince you that I don't :).

"but that only demography matters."

well,as someone once said, seeming isn't always being, but that being said, I'm not sure what more I can say that would convince you that I don't think this. I do think demography is a very important conditioning element though, and I do think that the majority of economists think it has no importance at all, so I am happy that I have a reasonably balanced view.

But since more or less everyone believes that people need eg product market competition reforms, I don't see what of any additional value would be served by my writing about it, and I, to boot, would be extremely bored writing about things which are so obvious. I don't think I could drag myself off the bed to blog if this was all I had to say :).

Its precisely because I think I have got hold of a part of the picture that most people are missing that I can motivate myself. I could, of course, be wrong. But we all take that risk, since here there are no guarantees. For the time being I am happy to be driven by my intuitions and my belief in my own ability to keep going and see what happens.

Time, let us hope, will tell.