Itaú analysis reveals that low unemployment impacts more than just labor-intensive sectors

06/04/2024

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Julia Gottlieb — Foto: Divulgação

Brazil’s robust jobs market has driven consumer prices measured by IPCA, affecting the entire basket of goods and services, not just the labor-intensive ones. This finding comes from a study by Itaú Unibanco, indicating that wages will continue to influence prices in the coming quarters.

Analysts typically observe the behavior of the services sector to gauge how the labor market and wages impact inflation. They particularly focus on two core measures established by the Central Bank: labor-intensive services (including activities like medical and dental services, beauty services, and domestic workers) and services sensitive to idle capacity.

However, these measures account for only 7% and 10% of the IPCA basket, respectively, representing only 17% and 28% within the services category. IPCA, the Portuguese acronym for Extended Consumer Price Index, is Brazil’s official inflation index.

“The issue with these metrics is that, since they are defined by exclusion, you end up looking at a group with a small weight within the IPCA,” said Julia Gottlieb, an economist at Itaú Unibanco. “We aimed to understand, more broadly, all the pressures coming from the labor market.”

To achieve this, Itaú developed a labor intensity indicator for every 377 items in the IPCA, using data from the statistics agency IBGE. This indicator considers companies’ wages and social contributions spending, the product’s weight within its sector, and production costs. The IPCA was then reweighted based on each product’s labor intensity.

As expected, this exercise increases the weight of services within the new indicator—to 53.4% from 35.5%. Personal expenses (20.8% from 10.1%), and education (14.9% from 5.9%) stand out among the categories with the most significant increases. Conversely, food and beverages (11.6% from 21%), lodging (10.1% from 15.4%), and gasoline (0.4% from 5%) see the most notable declines.

The reweighted index indicates that labor-intensive products are experiencing more intense price adjustments than the overall IPCA. While the IPCA recorded a 3.7% rise in the 12 months ending in April, the reweighted index increased by 5% over the same period.

Ms. Gottlieb said that the alternative index has been above the IPCA since the second half of 2022, coinciding with the unemployment rate dropping below 9%. This is the level Itaú considers the equilibrium unemployment rate, beyond which the labor market starts exerting upward pressure on inflation.

As measured by the Continuous National Household Sample Survey (Pnad Contínua), the unemployment rate fell to 7.5% in the three months ending in April, down from 7.9% in the previous three months. This result was below the median analyst expectation of 7.7%. Meanwhile, the average real income grew by 0.8% in the quarter ending in April and 4.7% compared to the same period in 2023.

The influence of the labor market on inflation dynamics is a recurring subject in speeches by Central Bank officials.

The minutes from the latest Monetary Policy Committee (COPOM) meeting show that officials discussed the issue but did not reach a consensus on the extent to which wage increases—stemming not only from productivity gains but also the improved bargaining power of workers in a stronger job market—are affecting prices.

“We tried to dissect each labor component in each service category to see if there is a correlation between wages and inflation. There does seem to be some pressure, but it’s very embryonic and not something we can clearly demonstrate,” said Central Bank President Roberto Campos Neto at an event organized by Grupo Lide on the 27th.

Looking ahead, Itaú expects the labor market to continue pressuring prices. Running a model based on the reweighted index and projections for inflation inertia and unemployment rate shows that the indicator remains above the services IPCA in the coming quarters, ending the year with a 12-month increase of 6.03%.

“We don’t expect the unemployment rate to rise significantly—it should remain below 9% this year—so the indicator will also stay pressured,” Ms. Gottlieb said. “It’s also worth noting that it hasn’t worsened. Marginally, it even shows some slight moderation, partly helped by the behavior of inertia. However, we assess that this exercise further supports the Central Bank’s cautious stance on monetary policy.”

*Por Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/