The strength of the labour market in the current low-growth environment is puzzling at first glance. Unemployment usually rises when economic growth is weak. However, the opposite has been true in Brazil since mid-2010.
In May, the unemployment rate neared a decade-low, falling to 5.8%, the lowest outturn for that month since the series began in 2002. At the same time, economic activity is increasingly sluggish. GDP in Q1 2012 grew by only 0.8% on an annual basis, the weakest reading in over two years. What explains this conundrum of low unemployment and low growth?
Falling productivity helps clear up at least some of the mystery. The data suggest that employers are using more workers to produce the same amount of output. As seen in the chart above, labour producitivity (the output per employed person) has declined steadily since early 2010. In the first quarter of 2012, labour productivity contracted by 1.1% on an annual basis. Notably, the employment rate rose to 54.2% in May, close to an all-time high, which underscores the view that more workers are now producing less, pointing to a troubling productivity problem.
Part of the productivity problem stems from a shortage of skilled labour. According to Manpower’s 2012 Talent Shortage Survey, Brazil ranked second, behind only Japan, with 71% of employers reporting difficulties filling jobs. The country’s historic under-investment in education has helped precipitate this talent shortage.
Protectionism is also a factor. For example, the government raised the so-called industrial products tax on foreign-made cars by 30 percentage points late last year. Such protectionism gives domestic producers less incentive to boost productivity when they face less competition from imports.
While falling productivity plays a major role in explaining the conundrum of low growth and low unemployment, we believe there may be another, related aspect to the issue. Given the high hiring and firing costs in Brazil and the shortage of skilled labour, firms may be hoarding workers in the hopes of an economic revival in the second half of the year.
This situation cannot continue indefinitely. As Brazil is now at or close to full employment, we do not foresee unemployment falling further in the second half of 2012.