Author: Sergio Lamucci

Source: Valor Econômico - São Paulo / SP - BRAZIL - 21/07/2010

Sergio Lamucci, from São Paulo

Formalization in the Brazilian labor market has intensified since 2004 in the wake of the stronger growth of the economy and reforms that stimulated the hiring of workers with a formal contract. In 2010, for the first time, the total number of workers with a formal contract exceeded 50% of the workforce employed in the six largest metropolitan regions of the country. This participation grew over the semester - it started at 50,3% in January and reached 51,1% in May. The percentage is a record. Since 2002, when IBGE's new series of jobs and unemployment begins, formal employment has never been more representative.

The advance of formalization in recent years shows a very different picture from that registered in the 90s and in the early 2000s, says economist Sérgio Mendonça, from the Inter-Union Department of Statistics and Socioeconomic Studies (Dieese). Figures from the Employment and Unemployment Survey (PED) of the metropolitan region of São Paulo do Dieese - which have an older historical series - show that between 1990 and 2003 the total of formal workers in the private sector fell 8,7%, to 3,150 million, while the number of unregistered employees almost doubled, rising 94,9% to 1,047 million.

As of 2004, the picture has changed. The number of formal employees in the private sector rose from 3,4 million in 2003 to 4,6 million on average in March, April and May 2010, an increase of 46%. In the same period, the stock of wage earners without a formal contract rose only 2,6%, to 1,075 million workers.

For Mendonça, the acceleration of growth is the main explanation for the advance of formalization. From 2004 to 2008, the country grew at an average of 4,8% per year. In 2009, the economy shrank 0,2%, but has already resumed a strong pace of expansion, expected to advance more than 7% this year. Between 1980 and 2003, the average was just over 2%.

"The numbers indicate that what was missing from creating formal jobs was stronger growth," he believes. From 2004 to June 2010, the generation of formal jobs exceeded 9,5 million vacancies, considering the difference between admissions and dismissals in the General Register of Employed and Unemployed (Caged).

Economist Fábio Romão, from LCA Consultores, points to stronger growth - and the perception that the country can sustain higher rates over time - as the main reason for the growing formalization in the labor market. This gives companies more confidence in registering employees.

Romão notes that part of the vacancies that appear in Caged refers to the formalization of existing jobs, even though it is not the largest share and there is no way to specify its total size, only the portion resulting from the inspection actions of the Ministry of Labor . According to Romão, this phenomenon is clear when comparing the growth of the stock of workers by occupation category in the Monthly Employment Survey (PME), from IBGE.

In May, the number of employees with a formal contract increased by 7% compared to the same month in 2009, while the number of informal workers shrank 0,6%. This difference, evaluates Romão, "indicates the formalization of existing vacancies".

In addition to the stronger growth of the economy, Mendonça believes that the approval of the General Law on Micro and Small Enterprises has contributed to the advancement of formalization in recent years. Known as Supersimples, the law came into force in July 2007, making it cheaper to hire a portfolio for smaller companies.

“It reduces the cost of a formal employment relationship”, observes economist José Márcio Camargo, from Opus Gestão de Recursos, that this type of reform has a greater weight in the recent formalization process than the pace of growth. According to him, the growing importance of credit in the Brazilian economy is also important. Workers with a formal contract have access to credit modalities such as payroll loans.

For him, this is another incentive for workers to seek formal employment relationships and be reluctant to accept informality, which can sometimes guarantee a higher net income.

The end of Cofins' cumulativeness, approved in 2003, also influenced this process, believes Mendonça. As the tax started to affect added value, larger companies began to pressure smaller suppliers to formalize themselves, to be entitled to tax credits, he says. In this process, companies tend to regularize the workforce, which also facilitates obtaining credit.

The increase in formalization is largely favorable to the economy, the economists point out. The government's cash is reinforced, since there is an increase in the contribution on the payroll and on the income of individuals. The process also helps to feed the growth itself, as Romão says. Those with a formal contract feel more confident to consume and enter loans and financing.