Research exposes program flaws, calls for labor cost cuts to combat informality

04/24/2024

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Bruna Mirelle Alvarez — Foto: Gabriel Reis/Valor

More than half of the so-called individual microentrepreneurs (MEIs) in Brazil work as salaried employees for other companies, research shows. The study indicates that the so-called “pejotização”—hiring of workers as firms rather than individuals—could be reduced with measures such as cutting labor costs on the payroll.

The survey conducted by Bruna Mirelle Alvarez, a researcher at the São Paulo School of Economics of the Getulio Vargas Foundation (FGV EESP), reveals that 53% of MEIs—part of a government program initiated in 2008 to empower millions of small businesses—are not genuine entrepreneurs. This highlights flaws in the program’s structure, leading to unintended consequences such as informal employment and significant losses, particularly for Social Security.

The study analyzed data from 2008 to 2019, a period during which over 9 million MEIs were established, comprising nearly 70% of all registered businesses in Brazil. To arrive at these findings, the researcher initially investigated the competitive dynamics between MEIs and formal employment contracts for companies’ recruitment preferences. This analysis involved examining how the proximity to 3G antennas influenced the establishment of MEIs between 2008 and 2011, a time when online registration became available.

“Having access to the internet is essential for microentrepreneurs. They need it to register the company, issue the Document of Tax Collection paid every month, and also the tax receipts for each service,” said the economist.

The findings also establish a connection between the accessibility of opening an MEI and firms’ hiring practices. Companies situated in areas farther from the antennas tended to employ more workers under the formal regime compared to those in closer proximity to the equipment.

However, Ms. Alvarez said that the effect of the reduction in the number of formal contracts and the increase of MEIs could also suggest a rise in entrepreneurship, aligning with the original intent of the program. “It’s important to note that solely based on this analysis, we cannot determine if these individuals were shifted towards informal employment,” she said.

To ascertain which paths individuals pursued, the researcher constructed a general equilibrium model wherein individuals decide between becoming salaried employees, informal workers, microentrepreneurs, or employees of formal sector companies. This model was fed with data from the National Registry of Legal Entities and the 2010 Census. By simulating how this model adjusts to real economic data, including the distribution of workers in firms over time, it revealed that 53% of those opting for the MEI route choose informality, while 47% evolve into “genuine” microentrepreneurs.

“Based on the results, I believe that the cost of the formal work contract is an important factor. Reducing these costs would be a good measure to help reduce these illegalities related to the labor market,” she said.

Other recent studies also point to problems in the design of the MEI, created in 2008 intending to formalize people who work as freelancers or in small businesses. It allows them to contribute to Social Security and access benefits such as retirement—limited to one minimum wage—, sickness benefits, and death pension.

A recent study by researchers at the Brazilian Institute of Economics (FGV Ibre) showed that the MEI accounts for almost all the growth in the number of business taxpayers numbers in Brazil, to 3.9 million in 2023 from 750,200 in 2009. Looking only at 2021, a year in which there was a peak in the creation of MEIs—they showed that 63% of them had been laid off from a formal job. Within this group, only 22.6% of the layoffs were at the worker’s request.

Another Ibre study, from 2022, showed that 31.3% of MEIs had completed higher education, a proportion much higher than the national average of 15.7%. Meanwhile, those with no education or incomplete elementary education—the program’s target audience—were only 13.4%. At the same time, looking at income, researchers found that 56.4% of MEIs earned more than two times the minimum wage in the third quarter of 2022, a percentage higher than that of employees with a formal job (32.1%).

“This explosion in the creation of MEIs may seem like a leap in entrepreneurship, but in reality, it is just a different form of insertion into the labor market, cheaper and more attractive. And with the aggravating factor that it contains a large subsidy to Social Security, which one day will have to be paid,” said Fernando de Holanda Barbosa, an Ibre researcher.

Due to its focus on the vulnerable population, the program has high government subsidy. In the case of contributions to social security, it is limited to 5% of the minimum wage for MEIs (R$70.60 in 2024). Whereas the salaried worker earning the minimum wage for Social Security contributes up to 34% of the salary, shared between employee (7.5% to 14%) and employer (20%).

The significant gap between contributions puts pressure on the Social Security system. Rogério Nagamine Constanzi, an expert in the field, estimates that the actuarial deficit of the MEIs could reach R$1.4 trillion in the future. According to his calculations, although MEIs represent approximately 10% of contributors to the Social Security Regime, their contribution to revenue is only 1%.

“It is worth remembering that a contribution of around 30% is precisely what makes Social Security actuarially sustainable over time. If there were a total migration to the MEI, it would not be solvent,” said Mr. Barbosa, with Ibre. “Because it is a relatively new modality, it has not yet affected pension payments. But this cost will come.”

Ms. Alvarez’s study conducted simulations of four hypothetical scenarios aimed at reducing the phenomenon known as “pejotização”: terminating the MEI program, eradicating informality, enhancing oversight, and cutting labor costs. All these scenarios led to an improvement in overall welfare, defined here as the combined sum of profits, wages, and taxes paid. However, the most effective measure proved to be a 20% reduction in payroll taxes. Despite this, it resulted in only a slight decrease in the total number of MEIs in the economy, to 60.9% from 61.5%. Additionally, while the percentage of informal workers in the labor market would drop to 32.4% from 33%, their proportion within the MEI community would increase to 54% from 53%.

Unlike the other scenarios, there is also an increase in the salary of both formal workers (2.4%) and informal workers (4.9%).

“As the tax on payroll is reduced, this increases demand for these workers and, thus, their salaries. With this, part of the MEIs who were previously entrepreneurs or informal workers move to salaried employment,” said Ms. Alvarez. “With fewer informal workers in the economy, the salary offered to them increases, and this balances the proportion of MEIs choosing to be informally employed.”

For the researcher, the results also raise the question of whether “pejotização” does not represent a new structure in the labor market, albeit illegal. “It’s bad in terms of labor rights but, perhaps even more so after the pandemic, people may be more willing to accept this type of arrangement, which brings more freedom in terms of working hours, and less bureaucracy in dealing with the company.”

*Por Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/