The following OECD assessment and recommendations summarise Chapter 4 of the Economic survey of Brazil 2006, published on 24 November 2006.
The policy distortions that encourage labour informality should be removed
Reducing widespread informality and the tax evasion that it entails will be essential for improving growth performance through a better use of labour inputs. It may well also contribute to alleviating income disparities. Low human capital is a key determinant of informality, but several features of the existing social protection programmes discourage the formalisation of labour relations. The introduction of a number of old-age and disability-related benefits since the early 1990s has served the purpose of strengthening the social safety net. However, such initiatives reduce the opportunity cost of informality, because eligibility is not conditional on social security coverage, although social assistance benefits are means-tested. This is especially the case for minimum-wage earners, who can apply for an old-age assistance pension (which is equal to the monthly minimum wage) at age 65, instead of receiving an old-age pension on the basis of lifetime contributions. Incentives for formality are weakened further, while undoubtedly serving a valid social objective, by universal access to publicly funded health-care services, which are not conditional on formal labour-market status. There are additional incentives for informality arising from the design of severance insurance (FGTS) in the event of unfair dismissal, which discourages employers from hiring with formal contracts. Against this background, efforts should focus on correcting these policy distortions, while striking the right balance between adequate, cost-effective social protection and incentives to work in the formal sector. Another important consideration is the affordability of social insurance coverage for individuals on low incomes. In this regard, the option of reducing social security contributions for minimum wage-earners should be considered both because it reduces the cost to employers of hiring formally and, since the minimum benefit is fixed, because it would make formal employment relatively more attractive to workers.
There are options for increasing labour supply…
Brazil already ranks high by international standards in terms of labour force participation for prime age workers. A gender gap nevertheless remains, especially if account is taken of part time work, which is more prevalent among females. The share of women working less than 20 hours per week is above the OECD average. In general, mothers with young children may opt for part time work as a means of reconciling household and work responsibilities. There is nothing wrong with this situation, unless individual choice is distorted by public policy. For example, a number of these part timers may want to work longer hours and are prevented from doing so by the scarcity of publicly funded pre school education and formal child care. Budget conditions permitting, current efforts to tackle the supply bottleneck should be stepped up by extending to pre school education the financing mechanisms in place for primary and lower secondary education (i.e. FUNDEF), which are working well. The potential benefits of this initiative go beyond the labour policy area: international experience suggests that access to early childhood education can improve school outcomes later in life. Another consideration when designing policies to lift labour supply is that of early retirement, given that Brazil’s average effective retirement age is much lower than in most OECD countries. The introduction of a statutory retirement age for private sector workers, recommended above, would contribute to improving the use of labour resources, in addition to strengthening the long term sustainability of the social security system.
… and for tackling unemployment
The empirical evidence reported in this Survey suggests that educational attainment is becoming an increasingly important determinant of employability. Properly designed active labour market policies can therefore be used to boost human capital, especially for those groups with the weakest attachment to the labour force, such as youths, women and the less educated. Activation programmes differ from conventional public employment services because they make participation in, for example, training and job creation programmes compulsory for targeted groups. Brazil’s experience with such programmes is relatively recent, comprising federal training programmes (PLANFOR/PNQ and PNPE) for the unemployed and vulnerable segments of the labour market. Although the cost effectiveness of these programmes has yet to be fully assessed, the option of making participation in an activation scheme compulsory for unemployment benefit recipients should be considered. Also, it is essential that employment services ensure that recipients look for jobs while participating in such schemes.
Educational attainment increases labour force participation and reduces unemployment
In %, population aged 15-64
Source: IBGE (National Household Survey, PNAD) and OECD calculations.
Labour training can be improved
Demand for labour training is likely to rise, because the labour market is offering increasing rewards for skills. This phenomenon is closely related to the pro competition reforms of the 1990s, including trade and investment liberalisation. Labour training will therefore be crucial for the accumulation of human capital by those individuals who are already in the work force and will not, or cannot, engage in formal education. Labour training is currently provided predominantly at the sectoral level by the so called “S” system, which is made up of non governmental organisations financed through para fiscal levies on enterprise payroll. By contrast, publicly funded vocational education is in short supply, essentially because the Brazilian system does not have separate vocational and general education streams. Efforts to improve the supply of vocational training while integrating it into upper secondary education, as is planned by the authorities, are therefore commendable. But labour training can become more cost effective through increased contestability. This could be achieved by replacing direct transfers to the non governmental service providers within the “S” system by vouchers that could be granted to individual workers and redeemed against training received from accredited institutions. For this policy measure to be successful, labour market information and vocational guidance services for potential participants should be expanded to help workers to choose which training to undertake.
A national certification system is essential for making skills marketable
There is no national system of skills certification in Brazil. This prevents the marketability of the human capital acquired through labour training. A national skills certification system should therefore be introduced. As a first step in this direction the pilot certification programmes that are currently in place in the industrial sector in the metropolitan region of São Paulo could be extended to other sectors, such as construction and services, where informality is more widespread, and to the poorer regions of the country. National standards should be set and compliance monitored regularly and transparently. To the extent that less educated workers who are currently trapped in the informal sector may acquire marketable skills through labour training, they can compensate for a lack of formal education.
Read also ECO Working Paper 533 Improving labour utilisation in Brazil
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Brazil 2006 is available from:
For further information please contact the Brazil Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Luiz De Mello and Diego Moccero under the supervision of Peter Jarrett.
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