April 10, 2017

The cost of work and its productivity is a crucial issue to try to interpret the backwardness and low economic growth in Brazil. I start with an example that always struck me, and never ceases to amaze me even after so many years in Brazil. Situation, a bar in São Paulo: behind the bar 5/6 bartenders, some of them without apparently nothing to do; same type of bar in Italy: behind the desk, only one bartender holds head to customers and – in some cases – performing cashier functions.

In my last trip to Brazil, at the beginning of 2017, I saw an Italian finger food, located in a very expensive shopping center, with 6 employees huddled behind the counter, when 3/4 would have been enough.

In some cases, when it comes to public works, you can even give a Keynesian interpretation and eventually agreed with the social aspect of the “useless job”: rather than digging holes in the desert and then fill them (as in America post crisis of ’29), better employ the excess labor for utilities (such as street cleaning, landscaping, etc.). People work, money circulates.

But when it comes to private companies, which have to face stiff competition? How to justify what may seem like a big waste of resources, energy, and money?

Brazil’s problems are obviously not only in this, but – as proven by many analyses – one of the great knots is the low productivity: the chart below measures the average annual labour productivity in US $, in various countries (2013): as you can see, the average productivity of labor in Brazil is less than 1/5 of the United States,  1/4 of the German and a half of the Russian.


On the other hand, labor cost does not reflect the same proportions of productivity, as shown in the graph below (in US $, 2012 data): the cost of labor in Brazil is 1/3 by the United States, whose productivity is almost six times higher: hence the huge competitive advantage.

costo lavoro

Unlike the case of the eurozone, where low labour costs outweighing the low productivity (but the recent depreciation of the euro has increased productivity and reduced labor costs in Europe). Even against the economies of developing countries, Brazil is at a disadvantage because of the disproportion between labour costs and productivity.

The causes of the low productivity of Brazil compared to other countries can be traced to a number of reasons:

– using production technologies obsolete or less advanced than other countries

– less investment in research and development of new processes and new products

– inefficient work organization

– less qualified labor

– selling prices relatively lower due to the inferior quality of the products or less marketing capacity (therefore less value added)

The Brazil must then face three major challenges in order to reduce the competitive disadvantage in relation to major economies:

  • increase investment in capital goods
  • increase investment in research and development
  • investing in education and training of its workforce, improving work organization

When investment in capital goods, in the previous post we highlighted – unfortunately – a declining trend of gross capital Formation (FBCF), indicator that measures how much companies have increased their capital goods, or goods which are used to produce other goods (machinery, equipment and materials of construction…).

In 2017, there are some signs of recovery of this important indicator, also thanks to foreign direct investment: to sustain a substantial economic growth of Brazil it is important that the Government’s economic policy push in this direction rather than family consumption side.

About research and development, Brazil invests little more than 1% of GDP compared with an OECD average of 2.3%. In recent years has boosted investment and increased research programmes, also in partnership with developed countries, but the effort of the Government and the private sector should be expanded. The current technological excellences (aerospace, oil and agriculture/mining) need to be expanded to other strategic sectors for Brazil.

It is also evident that, in order to gain competitiveness, Brazil needs to invest heavily on the quality of education (at all levels, from elementary schools to the University), on the extension of the presence of young people at school (the early school leaving is still very high) and training. The percentage of GDP invested in education is among the highest in the world (about 6%, which places the Brazil to 15° in the world), but despite this the quality of teaching is very low (the Brazil stands at 53° place in PISA ranking, which measures the level of student learning).

It is a problem of absolute values, given that the average annual expenditure per student is US $3,000.00 against 8,200.00 average OECD countries and highlights the urgent need for a comprehensive reform of the education system in Brazil.

In terms of labour costs, is being discussed in Parliament a “mini-reform” that aims to change the CLT (Consolidação das Leis do Trabalho) dated 1943. This is a legislation that, according to the entrepreneurs, create considerable difficulties at the time of contracting/resignation of workers and is responsible for the relatively high labor costs in Brazil. Suffice it to say that made gross annual remuneration value 100, the cost to the company can reach up to 283, or nearly three times as much as actually pocketed by the worker.

In parallel, a few days ago passed a law (Lei da terceirização) that widens the possibilities for outsourcing of activities by firms. If before you could outsource services like cleaning, supervision, accounting, from today you can give external management even those considered activities related to the core business. The changes proposed by the “mini-reform” and the new law on outsourcing will perhaps give more flexibility to the labour market but are likely to weaken workers’ rights.