Itaú survey shows that the decoupling of activity may bring down the occupation rate at the end of the year

09/30/2022

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Natalia Cotarelli — Foto: Divulgação

Both the labor market and economic activity in Brazil have surprised to the upside this year, but the recovery in employment has been sharper than it would be consistent with the evolution of the country’s GDP growth itself, economists say. Beyond some structural change that would make some of this gain permanent, the finding suggests that this very positive trend for employment may be short-lived.

In economic theory, there is an inverse relationship between GDP and the unemployment rate (the so-called Okun’s Law). A study by Itaú Unibanco shows that until the third quarter of 2021, the variation in unemployment was consistent with the performance of the economic activity, but since the fourth quarter of 2021, the data seems to have become decoupled. “The unemployment rate ended up falling much more than the GDP growth would suggest, according to the rule,” said Natalia Cotarelli, an economist at Itaú and a co-author of the study, along with Matheus Fuck and Claudia Bruschi.

The seasonally adjusted unemployment rate fell to 8.8% in the three months to July from 11.5% in the January quarter, despite the strong recovery in the labor market participation rate, which rose to 63.5% from 61.7% in the period, notes Itaú. In other words, the growth of the employed population more than offset the return of part of the people looking for work.

For Itaú, a labor market stronger than activity would suggest reflects a sectoral composition effect of growth — with the reopening of the more labor-intensive service sector in the post-pandemic — and some impact of the 2017 labor reform.

In the first and second quarters of this year, GDP expanded 1.1% and 1.2%, in that order, on a seasonally adjusted quarter-over-quarter comparison, with the services sector accounting for more than half of the growth (0.7 and 0.8 percentage points, respectively), Itaú notes. “The recovery of the employed population in these very labor-intensive sectors was stronger in late 2021 and early 2022,” said Ms. Cotarelli.

In this scenario, the average productivity of the economy (which jumped during the pandemic because of the resilience of capital-intensive sectors, which are more productive) started to decelerate and seems to have returned to the pre-pandemic pattern, the bank said. This, according to Itaú, indicates that the labor market is likely to return to growth more in line with the evolution of GDP ahead.

“The outlook now is for a labor market moving basically sideways in the second half of the year,” said Ms. Cotarelli. Itaú expects the unemployment rate to rise to 9.1% in December from 8.8% in the July quarter, and to rise to 10.1% by the end of 2023.

The impact of the labor overhaul on the economy is more uncertain, Itaú acknowledged, but some data and academic studies have pointed out that the changes may have generated positive effects on the market, for example by reducing the filing of labor lawsuits and, therefore, costs. All other things being equal, this fall may increase the demand for labor without raising the cost of labor, which tends to reduce the non-accelerating inflation rate of unemployment (NAIRU) — the rate beyond which there is pressure on inflation.

After the labor overhaul passed in Congress in 2017, the proportion of formal employment in relation to the total seems to have stopped the downward trend that had taken place since 2015, notes Itaú. “In 2018, it became stagnant, which could indicate some effect of the overhaul. The pandemic came and everything became very distorted, but now it seems that this proportion has stabilized at the level close to 2018, suggesting an impact of the reform for formal jobs,” said Ms. Cotarelli.

Bráulio Borges, a senior economist at LCA Consultores and an associate researcher at the Brazilian Institute of Economics (FGV/Ibre), said that the real “outlier” in the relationship between GDP and unemployment rate in Brazil was the second quarter of 2022.

Mr. Borges reweighted the participation of the GDP sectors not by their value added to the total economy, as statistics agency IBGE does, but by the number of people employed in those segments. In the first half of 2022, this “GDP from the point of view of occupation” rose 5%, compared to the equivalent moment in 2021, almost twice the official GDP advance in the period, of 2.7%. Since 1995, never in a two-year period has the GDP been so “pro-employment” as in 2021-2022, notes Mr. Borges.

This difference between the GDP reweighted by occupation and the official one happens, according to the economist, because the sectors that are growing the most this year are labor-intensive, such as services and construction, but, in general, of low productivity – that is, they generate many jobs, but add relatively less value to the economy. “I have more employment than GDP,” said Mr. Borges.

By submitting this reweighted GDP to Okun’s Law — which Mr. Borges further divides by the working-age population (14 or older), to add a notion of labor “supply” — the economist managed to maintain the relationship between GDP and unemployment rate even in the fourth quarter of 2021 and the first quarter of 2022. “But it is not possible to understand the behavior of the labor market in the second quarter merely by sectorial composition,” said Mr. Borges.

In the period, 4.4 million new jobs were created, or 18 million in annualized terms, which would be compatible with a GDP varying around 5%, according to the economist. In the first half of the year, however, GDP grew 2.5% year over year, and the median of the Central Bank’s Focus survey with analysts indicates a growth of 2.7% for the year.

According to Mr. Borges, a more structural change could be taking place in the relationship between activity and the unemployment rate because of the greater flexibility introduced in the market after the 2017 labor overhaul. For him, however, the signs in this direction are not yet so robust, so Mr. Borges bets more on an early effect of hiring.

Mr. Borges recalled that at the end of the second quarter, the government signaled that it would make other stimuli near the elections. “This may have prompted hiring in sectors of the economy due to the expectation that activity would still be strong in the third quarter,” he says.

This is a hypothesis that will be “easily verifiable” or not as the data are published, says Mr. Borges. For every percentage point that the GDP grows above the working-age population (PIA), unemployment in Brazil drops 0.5 points. For demographic reasons, the PIA has been growing 0.8% per year, while the Focus indicates 0.5% growth for the GDP in 2023. “There is an indication that unemployment may rise next year,” said Mr. Borges.

In Mr. Borges’s projections, GDP from the perspective of occupation should still advance 4.5% in 2022, for an overall GDP growth of 2.8% estimated by LCA. In 2023, however, this difference would be eliminated, with both rising 0.4%.

*By Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/