Brazils Unemployment Rises to 11.

2%
in March-May Period
By ROGERIO JELMAYER, The Wall Street Journal
Updated June 29, 2016 9:28 a.m. ET

SO PAULOBrazils unemployment rate increased between

March and May, while wages continued to decline, as Latin
Americas largest economy faces a deep and prolonged
recession.
Joblessness rose to 11.2% from 10.2% in the previous threemonth period and 8.1% compared with a year earlier, the
Brazilian Institute of Geography and Statistics, or IBGE, said
Wednesday.
Average monthly wages fell to 1,982 Brazilian reais ($582),
adjusted for inflation, from 2,037 reais in the year-earlier period.
The drop in jobs and wages comes as the countrys
recession lingers. After contracting 3.8% last year, Brazils
economy is expected to shrink 3.44% this year, according to a
weekly central-bank survey of 100 economists.
Wednesdays data were from a recently created, nationwide
unemployment survey, known as PNAD, that the IBGE is
phasing in. The survey that it replaced collected data only from
1

six major metropolitan areas.

The article highlights the sharp increase in Brazil's unemployment rate to 11.2% during March-June
2016 from 10.2% in the previous three months and 8.1% a year earlier. The International Labour
Organisation defines unemployment as people in the labour force (i.e. of a working age, who are
willing and able to work), actively seeking employment but not currently employed. Unemployment
rate is defined as the percentage of people in the labour force who are unemployed. A recession is
defined as A recession is a significant decline in activity across the economy, lasting

longer than two quarters.

According to the article, the increase in unemployment rate is caused by the deep and prolonged
recession, implying that it is cyclical unemployment which is unemployment that is related to the
business cycle. Since the unemployment rate increased by 1 percentage point between the most
recent quarters, as compared to approximately 2 percentage points over the previous three quarters,
unemployment is increasing at an accelerated rate. The article also indicates that the average real
wage fell 3% in a year. This effective wage contraction combined with an accelerating unemployment
rate underscores the severity of the problem.

In the graph above, AS represents the labour force while AD 1 represents the aggregate demand for
workers a year ago in Brazil. The number of workers employed a year ago was Q e, at an average
wage We. Due to the recession, the demand for goods has decreased, resulting in lower sales and
profits. Hence employers have retrenched workers to match lower demand for goods and reduce
wage expenses. Therefore, the aggregate demand curve for workers shifts initially from AD 1 to AD2.
In the short run, average wages remain stable at We (due to trade unionism and employee protection
laws), but the number of employed workers decrease to Q 1 from Qe. This is known as sticky wages.
The equilibrium point C where all the available jobs are taken by every job-seeker is not reached in

market economies, because an exact matching of each workers specialization to the skills required
for each job at that time is implausible. For example, a farmer requires training, over a period of time,
to become a mechanic. However, some skilled workers are willing to accept lower wages due to their
desperation for employment. Hence the average wages reduce while the number of employed people
increase slightly from Q1, causing the average wage and the number of employed workers to
approach but not reach Qc.
The average wage in Brazil has reduced but unemployment has continued to increase implying that
the prolonged recession has now driven the demand curve further towards the axes, to AD 3 as shown
below.

The increasing unemployment rate and falling wages can be attributed to the recession but may also
be partly attributable to the change in survey methodology (making period to period comparisons
inaccurate). The article mentions that previous surveys collected data only from six metropolitan areas
but the new survey covers 3,600 municipalities. Therefore, for example, if the rural unemployment rate
is higher than in metropolitan areas, the new survey data, although more representative, would
erroneously imply accelerating headline unemployment rates.
This higher unemployment rate in Brazil will exacerbate the recession since the labour
force/consumers, with lower wages and less disposable income, will curtail spending. This in turn will
reduce demand for goods, negatively impacting production and unemployment thus perpetuating the
cycle.
With higher unemployment and lower GDP, the governments tax collection will decrease.
Unemployment is also a factor in social issues such as crime, mental health and lower standards of

living; if persisting over longer periods it could lead to political instability.

Governments therefore attempt to intervene and reduce unemployment one option is through an
expansionary monetary policy. This reduces interest rates; cheaper financing can kick-start the
corporate investment cycle and encourage private consumption. This, over time, can decrease
unemployment and bring Brazil out of recession. However, such policies risk stoking higher inflation.
A second intervention option is through fiscal policies e.g. higher government spending (e.g. a
national infrastructure buildout could benefit residents and create employment opportunities) or tax
cuts (increasing disposable income). Such fiscal policies can have short term benefits but, if continued
with, could have serious long term consequences such as high fiscal deficits (due to reduced tax
collections and higher government spending), which could cripple the economy.
To break this cycle of recession and unemployment, Brazil should adopt both fiscal and monetary
policies, backed by investments in education and training (to reduce structural unemployment),
subsidies for investments in depressed areas (to incentivize job creation) and enact flexible labour
laws (to encourage hiring).