Cyclical Variations in Participation and Employment in Urban Brazil

Abstract

Brazilian labor markets have performed very strongly for most of the last 15 years, with dramatic increases in the employment rate of unskilled workers and significant declines in the overall unemployment rate. However, the economic and political developments and fiscal crisis of the last sixteen months in Brazil have resulted in a substantial decline in the rate of economic activity , a dramatic slowdown in the rate of new job creation a devaluation of the domestic currency and increasing concerns about the sustainability of the gains in poverty reduction and inequality accomplished during the years of the commodity boom. The decline in economic activity has raised concerns again about increasing unemployment rates, and the extent to which these developments will have an adverse impact on specific age and gender groups. Efforts to maintain or increase the proportion of the population employed in the aggregate or within any specific demographic group must take into consideration how the unemployment rate and the labor force participation rate of the group vary with changes in the level of economic activity. The sensitivity of the proportion of the population employed to changes in the level of aggregate demand is a key parameter informing the design of an appropriate and effective labor market policy. Specifically, teenagers and young women between 20-34 years of age comprise only 25 percent of the adult population, but they account for more than 50 percent of the cyclical variation in employment. In contrast, adult men between 26 and 64 years of age, who comprise 32.6 per cent of the population in the US account for only 23.6 percent of the change in the cyclical variation in employment. Estimates of the sensitivity of the proportion of the population employed to changes in the level of aggregate demand based on data from recent years that reflect the prevailing structural relationships between labor demand and employment and labor supply, labor force participation and unemployment are more useful for predicting how labor force participation is likely to react to the downturn in economic activity since the end of the commodity boom and the onset of the economic crisis in Brazil. The purpose of this paper is to examine two inter-related questions about the behavior of the labor market in Brazil. The first question is about the direction and sensitivity of the labor force participation rate, and the employment rate to changes in the level of aggregate demand. The second question relates to the differences in the cyclical sensitivity of these key variables across age and gender groups.The next section of the paper discusses the recent macroeconomic context, and some of the limitations associated with using Pesquisa Nacional por Amostra de Domicilios (PNAD) data to predict changes in the on the labor force participation rate of different age gender and skill groups during the crisis. Section 3 discusses the data and the model used