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Is there a remedy to Brazil preserve employment and income during the crisis?

A new government program aims to protect jobs and small companies. Analysts praise some measures but say they are timid and that negotiations to reduce wages should be collective

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Brazil’s government launched a new batch of measures to counter the effects of the coronavirus crisis on employment and businesses’ cash flows. The program enacted on Thursday allows companies to reduce workers’ wages and working hours, or temporarily suspend labour contracts. To apply, companies will have to preserve jobs after salaries and hours are restored.

The program joins a recent move by the government that has the goal of keeping a minimum income to people in a more fragile economic position. A measure that had been previously approved by Congress and was signed into law by President Jair Bolsonaro will transfer BRL 600 ($114) per month to Brazilian informal workers for three consecutive months.

Another new initiative is by giving Brazilians more time to turn in their income tax returns. Initially planned to end on April 30, the deadline for the submission of forms to the country’s IRS was extended in 60 days.

A third relief is also fiscal, albeit to businesses: the Revenue Service postponed the monthly payment of two federal corporate taxes and employers’ contribution to social security from April and May to August and October, while also suspending a financial tax (IOF) on credit transactions for 90 days.

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Roberto Piscitelli, professor of public finance at the University of Brasilia (UnB). Photo: Facebook/UnB

Roberto Piscitelli, professor of public finance at the University of Brasilia (UnB), says the scenario is “frightening” and the official measures, although positive, are still timid. “The government is taking everything very smoothly and it seems to me that it is adopting palliative measures, which only remedy the crisis in the labor market but do not really reinvigorate the economy”, he told LABS.

Jobs versus earnings

According to the scheme aimed at maintaining job positions, companies will be allowed to reduce wages and hours by 25%, 50% or 70%, with a proportional reduction in working hours for a period of three months, and the government partially making up for workers’ lost earnings. The government will cover the same reduced rate, but it will be calculated over unemployment insurance, not the worker monthly salary – which can result in significant income losses for well-paid jobs. 

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Employers could also opt to suspend workers’ contracts for up to 60 days, but they will have to pay 30% of wages in compensation. Conversely, according to the Ministry of Economy, job positions will be temporarily maintained until the worst of the crisis has passed. After the program expires, firms that accepted government aid will not be able to lay off employees for the same number of months in which wages have been reduced or contracts have been suspended.

The Ministry of Economy says the program could potentially save up to 12 million jobs, and it will cost the Treasury BRL 51 billion ($10 billion). But the policy is also attracting criticism. The main problem seems to be the possibility, instituted by the executive order through which it is being enacted, for companies to reduce wages and working hours on individual agreements with workers.

“In our view, there was no alternative to the federal government but to adopt such measures, however, it should be noted that in times of great fragility, due to the social moment and the economic crisis that we are going through, to impose individual negotiation on workers, these may end up being an imposition,” says Fábio Luiz de Queiroz Telles, a professor of labor and corporate law at the Pontifical Catholic University of Paraná (PUCPR), in an interview with LABS.  

Fábio Luiz de Queiroz Telles, a professor of labor and corporate law at the Pontifical Catholic University of Paraná (PUCPR). Photo: PUCPR.

A requirement for mandatory union negotiations to reduce wages and suspend contracts would bring greater legal certainty to workers.

Fábio Luiz de Queiroz Telles, professor of labor and corporate law at the Pontifical Catholic University of Paraná (PUCPR)

These measures are part of a broader BRL 200 billion ($38 billion) government package to safeguard jobs and help companies, according to the minister of economy, Paulo Guedes. The tax measures announced amount to BRL 87 billion. There is a BRL 7 billion waiver related to the IOF cut-off. The other BRL 80 billion will come from the postponement of contributions to social security.

Flexibility in labor rules for small and medium-sized companies is good, but Piscitelli believes that reductions should be limited to 25% of wages and hours, so as not to further depress the economy with a lack of income among workers. “Maximum attention has to be given to micro and small companies, both in the form of and tax cuts and postponements, as well as to preserve job positiions. Postponing tax collection is a good measure the government adopted”.

Informal economy

But according to Piscitelli, the government should spend greater sums, and for a longer period, in direct cash transfers. But the professor finds it difficult for this to happen, as the government’s economic team comes from an ultra-orthodox liberal school.

Unemployment will inevitably rise. There will be more workers in an informal situation, and they will need help. In the current circumstances, there should be no worries about budget deficits

Roberto Piscitelli, professor of public finance at the University of Brasilia (UnB.

Brazil will spend about BRL 98 billion ($19 billion) to try to assist 54 million informal workers affected by nationwide lockdowns. President Bolsonaro said that the transfers of BRL 600 per month should begin next week.

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Entitled citizens must be over 18 years-old and without formal employment; not receive social security or welfare benefits, such as unemployment insurance or federal income transfers, except Bolsa Família; have a per capita income of up to 50% of the minimum wage or a total household income of up to three minimum wages (BRL 3,135); not have had a taxable income above BRL 28,559.70 in 2018.About 11 million people (17.3% of potential beneficiaries) are not registered on the Single Registry, the official database that identifies low-income families in the country and which will be used by the government to transfer the monthly stipend. Officials will have an extremely hard task in registering all these people in a short time so they can get the assistance.