Rural Credit and the Mix between Permanent and Temporary Wage Labor Contracts in Pernambuco, Brazil

Abstract

During the last three decades, urban-based agricultural workers have grown in number and visibility throughout Brazil, provoking research into the forces that drive shifts in agricultural wage labor demand away from (year-round) toward temporary (daily, weekly, or harvest season) arrangements (see UNESP). The mix between permanent and employment is of great concern in the sugarcane-producing coastal zone of Pernambuco, where both and permanent employees find steady work cutting cane during the fourto six-month harvest season, but only permanent employees have steady work during the rest of the year. Temporary workers released from agriculture during the slack season find little nonagricultural employment, so their incomes drop sharply; and such seasonal reductions in income are considered especially deleterious to the welfare of workers who have little ability to smooth consumption through borrowing. Increased seasonality in agricultural employment, which takes the form of a reduction in permanent employment as a share of total harvest season employment, may generate broader social costs as well, by inducing seasonal increases in theft, prostitution, and urban unrest, and increased seasonal migration of household heads away from their families. Thus, inferences about the effects of agricultural developments on the welfare of both the rural poor and small town dwellers require examination of changes in the mix between permanent and agricultural employment, as well as changes in total peak season employment and wage levels. A study of agricultural wage labor markets in Pernambuco (Anderson) showed that an absolute and relative decline in permanent employment during the 1960s resulted largely from the introduction of severance pay legislation for rural labor. The legislation increased the relative cost of labor hired under permanent contracts and changed the nature of the permanent labor institution by eliminating employers' ability to use the threat of dismissal as inducement for permanent employee subjection. In the 1970s the volume of employment continued to grow. Permanent employment grew even faster, however, because as labor markets grew tighter, permanent contracts became increasingly attractive as means for guaranteeing the availability of harvest season labor. Despite the continuation of these forces into the mid-1980s, the ratio of permanent employment to total harvest season employment failed to increase, and even appears to have declined. This paper argues that the great increase in interest rates on rural credit in the 1980s significantly reduced farmers' incentive to employ workers on a year-round basis, and in fact explains the relative decline in permanent employment during the period. The conceptual framework for the argument is described in the second section, and a more formal discussion of the model may be found in an appendix available from the author. The model incorporates economic rationales for the observation that slack season labor is hired under permanent contracts, Julie Anderson is an assistant professor of economics, Stanford University. Field research support through the World Bank's McNamara Fellowship Program is gratefully acknowledged. The author thanks Richard Meyer for helpful comments.