Strict laws stimulate informality in Brazil


By Ronaldo D'Ercole and Cássia Almeida, O Globo - 22/12/2004

SÃO PAULO and RIO. The rigid Brazilian labor legislation continues to generate distortions in the national labor market, even with the resumption of economic activity. A survey by economist José Pastore shows that, from July 2003 to July this year, the formal labor market grew by 2,4% while the informal one grew by 9,6%.

? Does Brazil have the strictest labor laws in the world and the consequence is that few companies hire employees and when they do they do it informally? says Pastore.

According to the economist, today 60% of Brazilians who work are informal. There are 31,7 million Brazilians with a formal contract against 47,5 million informally employed and 8,5 million unemployed.

? It is a colossal number, and the most inhumane consequence of this situation is that almost 50 million Brazilians have no legal protection.

Another problem with the distortions of legislation affects one of the most vulnerable areas of public administration, Social Security. Although they do not contribute to the INSS, informal workers can retire at age 65 with a minimum wage. An account that does not close because only 40% of formal workers collect social security contributions.

Another problem with labor legislation is bureaucracy. If there was room for simplification of laws, Pastore says, formal hiring would naturally increase:

? Simples, a program that simplified the collection of taxes and social security contributions for micro and small companies, generated 3,5 million jobs in the first three years of implementation.

The complaint is from the Federation of Commerce of the State of São Paulo (Fecomércio-SP). According to the president of the federation, Abram Szajman, the tax bureaucracy is the same for small and large entrepreneurs:

? It is not just labor legislation that leads micro and small businesses to informality. It is the set of measures and taxes, which is extremely expensive.

Pastore estimates that the set of rights provided for in Brazilian legislation ends up causing the hiring expenses for companies to reach 103,46% of the employee's salary, against 79% in France, or 9,03% in the United States. That is, each Brazilian registered in a portfolio that earns R $ 1.000 monthly costs R $ 2.030 to the employer.

? And does this apply to all companies, regardless of their size? says, noting that 95% of companies in the country are small.

Despite agreeing that labor legislation needs to be reformed, as it is very detailed, the director of the UFRJ Institute of Economics, João Saboia, does not see a direct relationship between job creation and legislation:

? The law does not inhibit the opening of vacancies. It can, however, lead to informal hiring. But rules are needed, guaranteeing basic and fundamental benefits. What exists today is an excess of rules. This is an incentive for non-compliance.

A study released by professors at American universities in Yale and Harvard, with support from the World Bank (Bird), shows that Brazil has the strictest labor legislation among 85 countries.

In the rigidity ranking, Brazil surpasses Kazakhstan

In the score that takes into account aspects of the law such as flexibility of employment contracts, conditions of employment and job security (dismissal costs), Brazil figures with 2,4 points, higher than in Mozambique (2,23) and Kazakhstan (2,07). Japan and the United States had 1,42 and 0,92 points, respectively, on the same scale of rigidity. Chile and Argentina, appear with 1,56 and 1,55 points in the same ranking.

? The study finds what those who are in the day-to-day business already know well? says the president of the Center for Industries of the State of São Paulo (Ciesp), Cláudio Vaz.

Both Vaz and Pastore demand more effective action from the government to accelerate the labor reform process.

? Has the government wasted enough time and has the Forum so far dealt with formal issues, far from reality? says Vaz.