Good jobs, higher wages and an unholy combination

• We explore a new dataset on wages provided by CAGED, namely wages of newly admitted workers broken down by sector. This allows us to investigate further the dynamics of the labor market, which – as we have argued in our previous report – is the source of the discrepancy in the performance between manufacturing and services;

• Our first finding is that, contrary to lore, good jobs are no monopoly of the manufacturing sector. Quite the opposite, wages in the services sector are generally higher than those in manufacturing, although the difference has been declining over time. In other words, the notion that the good jobs are in manufacturing simply does not survive the confrontation with the data;

• That said, the decline of services wages relative to manufacturing seems to reflect the gradual tightening of the labor market. As labor becomes scarce and the sectors have to compete for workers, manufactures cannot afford to pay lower wages under penalty of losing more workers than optimal;

• Yet, services (non-tradable) and manufactures (tradable) sectors are subject to distinct price dynamics. The former can pass-through higher costs to the extent that domestic demand sanctions it; the latter, however, is constrained by international competition. As a result, higher wages translate into higher unit labor costs in both sectors, but, whereas this implies squeezed margins for manufactures, the services sector has been able to keep, if not improve, its margin;

• This is aggravated by the asymmetry of the performance of unit labor costs across sectors. Not only have wages increased faster in manufactures, but also there is some evidence of slower productivity growth in the industry as a whole, comprising manufactures, explored in previous reports. We find, thus, evidence of unit labor costs rising significantly faster in the manufacturing sector;

• Against this background we can understand the relative weakness of industrial output. Yet, as the currency depreciates there is additional room for the sector to pass-through some of these costs to final prices shielded from international competition. This may be at the heart of the recent acceleration of industrial wholesale prices, even in an environment of weaker manufacturing prices in a global scale;

• Yet, as the Central Bank has signaled that it does not want the currency to strengthen, it seems unlikely that it would be worried to the point of doing anything to prevent this outcome. As its commitment to the inflation target weakens and its concern about output grows, it is likely to welcome this development

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