Workin’ Man Blues

• There seems to be a widespread belief that Brazilian potential GDP growth stands at 4% to 4.5%, transparent not only in consensus forecasts suggesting that growth should trend back to those levels in the next couple of years, but also in government promises to push growth government to more than 4% in 2013;

• Whereas I shared these beliefs until not long ago, some developments, chiefly in the labor market front, have led me to question them. Indeed, growth during that period was accompanied by a significant reduction in unemployment rates. Yet, the very definition of potential growth associates this concept to unchanged unemployment rates, as long as the NAIRU (non-accelerating inflation rate of unemployment) remains itself constant;

• Indeed, employment growth averaged 2.5% per annum from 2003 to 2010, well in excess of working population growth, around 1.5% per annum, but declining in recent years to 1.2% per annum;

• We estimate that, if growth reaches 1% per quarter in the second half of 2012 and remains at this pace until the end of 2014 (leading to annual growth around 4% per annum) unemployment would reach as low as 3.5% in late 2013 and around 2% at the end of 2014. Given the current evolution of nominal wages, when unemployment hovers around 5.5%, it is not difficult to conclude that this would lead to wage growth well beyond any level consistent with inflation close to the target in 2013 and 2014;

• As a matter of fact, we have estimated in previous research that (trend) productivity growth has remained around 1.5% per annum, a figure that suggests that the bulk of GDP growth during these years has come from the incorporation of those previously unemployed into the workforce. Yet, this process cannot go forever: without further productivity acceleration output growth will eventually converge to population plus productivity, well below the 4-4.5% per annum believed to be potential growth;

• This reasoning departs from the notion that the NAIRU remained unchanged throughout the period, but it is possible to build a case of a “structural” reduction of the NAIRU arising from the construction boom, expressed by constriction construction GDP surpassing overall GDP by 0.7% per annum since 2003, whereas it lagged GDP in previous years;

• We made an attempt to build a “counterfactual”, namely what would unemployment be in case there was no construction boom, and estimate that it would be about 0.6% higher than observed in 2012. This is relevant, but accounts to less than 10% of the reduction of unemployment observed between 2003 and 2012, suggesting that the bulk of unemployment decline in the period indeed resulted from output growth beyond potential.

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