Brazil’s population is facing COVID-19 from an already financially weakened situation following the 2015-16 crisis. The poorest were still recovering from the crisis, with the income of the poorest 40 percent of the population still below the pre-crisis level.
Moreover, unemployment rates barely reduced from a peak of 13.7% in the first quarter of 2017 to 12.2% in the first quarter of 2020, and household debt burden is high at 45% of household income, reflecting increased non-mortgage debt since 2017. The bottom line is that most Brazilian families have little room to absorb another shock.
To understand better how Brazilians are being affected we need to consider which sectors will suffer labor income losses, and how these shocks affect different households. The most affected sectors are services, particularly those with heavier reliance on face-to-face interactions and limited telework potential. This affects particularly lower income workers in services sector with limited capacity to telework. Likewise, women also tend to work in more face-to-face intensive occupations.
Overall, the World Bank has estimated that these shocks will significantly reduce the earnings of over 30 million workers, and they could reduce household income by an average of 9% nationally, with more severe effects on low and middle income groups.
The Brazilian labor market is divided between protected (formal salary workers) and unprotected workers, including the informal and own-account. Wages of formal salary workers are “sticky”, so adjustments from economic shocks are more likely to come through reducing employment (including reduction in hours) than reducing wages. Yet, their income is protected in the short term by regulations like sick leave and, in the event of a layoff, unemployment insurance (UI), severance pay (multa), and employer-funded savings accounts (FGTS).
We estimate that about 80% of formal workers in the private sector have around 3 to 6 months of salary protection through UI, multa, and FGTS. By preserving income of short-term lay- offs during the pandemic, we estimate that these programs would contain the number of new poor (those living on less than half one minimum salary) to around 4 million less that if they were not in place.
The challenge is to ensure that the Brazilian unemployment insurance system can cope with the surge in new requests, particularly as Sistema Nacional de Emprego (Sine) offices could not operate. Many are now using the online application system for the first time.
But government efforts are focused during the pandemic in maintaining the jobs and not just the income. The 2017 labor reform that regulated part-time work, and the MP nº 936/2020 passed at the crisis’ onset introduced flexibility for firms to furlough workers or reduce their working hours without firing them.
A key element of this measure was the Benefício Emergencial de Manutenção do Emprego e da Renda (BEm), that partially compensate workers’ salary losses from the reduction in paid time, preserving jobs that can be productive once social distancing measures are relaxed.
The main challenge however rests with the informal and own-account workers who are more exposed to income shocks and lack access to formal income protection mechanisms. To protect this population the government has introduced (i) the expansion of Bolsa Familia to include 1.2 million new families from the waiting list and (ii) the temporary Auxilio Emergencial (AE) program, providing three monthly transfers to informal, own-account, and unemployed workers without UI benefits, as well as beneficiaries of Bolsa Familia (BF).
This comprehensive package of assistance can make the difference in how families are coping with the pandemic in the short term. The introduction of AE and the expansion of BF represents an increase of the income of the poorest 40 percent (for instance, the average BF family receives less than BRL 200 per month and will now receive BRL 600 to 1200 monthly for three months). In fact, assuming that temporary interruptions in employment last for 6 months, these benefits have the potential to eliminate the expected increase in poverty.
Risks are however that not all beneficiaries manage to receive AE, particularly difficult for those with lower levels of schooling and those without internet access. WB estimations calculate that if only half of the eligible families were able to successfully register for the AE, poverty could increase by 3 million people. Therefore, it is important to take proactive steps, including local outreach and alternative registration options, to help these workers access the program.
So far, phase one of government efforts focused on preserving income of the poorest and as many jobs as possible during the pandemic. Phase two, during the recovery, will need to facilitate labor reallocations as we may expect a segmented job recovery and accelerated structural transformation (for instance, digitalization/mechanization). This may leave some workers dislocated and in need for prolonged income support.
In fact, there are ongoing discussions about extending AE beyond the 3 months originally foreseen. Policymakers will have the daunting task of targeting these measures selectively and finding the fiscal space for them. Given the overall size of the social protection system in Brazil, this may entail a reform of other benefits such as Abono Salarial or the most generous pension regimes.
Also, strong attention will be needed to the incentive-compatibility of temporary benefits and unemployment insurance, for instance by investing in measures that allow enforcing training or job search during paid time out of work, in line with international best practice. In addition, active labor market policies can equip vulnerable workers with skills and information to navigate these changes. These investments may actually make the labor market support system less expensive in the medium term.
Given the scale of benefit recipients and social distancing measures, training and intermediation policies will likely need to be digitally enabled. Affordable and wide access to internet and digital literacy itself will be key.
This article was written in collaboration with Liliana Sousa, senior economist, and Matteo Morgandi, senior economist, of the World Bank.