This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research

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1 This PDF is a slction from an out-of-print volum from th National Burau of Economic Rsarch Volum Titl: Explorations in Economic Rsarch, Volum 4, numbr 1 (Indxation, Th Brazilian Exprinc Volum Author/Editor: M. Ishaq Nadiri and Affonso C. Pastor, ditors Volum Publishr: NBER Volum URL: Publication Dat: 1977 Chaptr Titl: A Critical Rviw of th Rlation btwn th Post-1964 Wag Policy and th Worsning of Brazil's Siz Incom Distribution in th Sixtis Chaptr Author: Robrto B. M. Macdo Chaptr URL: Chaptr pags in book: (p )

2 116 Adroaldo Moura Da Silyà VI FINAL COMMENTS Hr is th prin ipa mssag at this study. Th mi nidvaluation Pulicy adoptd by Brazil is ssntially th application of th purchasing Powr parity thory, which, in turn, was nsprd by th tachings of th quaritita. tiv thory of mony. It upholds th spirit of a systm of fixd xchang rats, xcpt for th fa t that it nutralizs th unfavorabl impact of domstic: inflation on th balanc of currnt transactions. Hnc, thr is a twofold rol that xchang policy can play: (1) nutralizing th harmful ffcts of domstic inflation on th trad balanc du to th changs in rlativ prics of domstic goods, on th on hand, and of intrnational goods, on th othr, providd th trms of trad rmain constant; and (2) avoiding th disquilibrium in th trad balanc gnratd by changs in th trms of trad, which rsults in inflationary prssurs in th cas of gain, or in dflationary prssurs on production and mploymnt in th cas of dtrioration in th trms of trad. Although thy ar obvious, it is worthwhil to mphasiz ths basic factors undrlying th Brazilian systm of minidvaluation, spcially at a particularly difficult momnt lik th prsnt on in Brazil. Finally, it b pointd out that must w hav dlibratly omittd som of th othr aspcts of th problm, spcially in rgard to th capital account. Hr th policy of minidvalijation can h undrstood as an incntiv to attract financial rsourcs: if th policy is carrid out so that dvaluation occurs through th diffrnc btwn domstic and forign inflation, th indxation rat on th cruziro countrpart of th xtrnal dbt is ncssarily smallr than that applicabl to domstic valus. Thus, sinc th capital markt abroad dos not anticipat xtrnal inflation through a ris iii th nominal intrst rat, th Brazilian businssman is providd with an incntiv to obtain in th forign capital markt. rsourcs This aspct of th problm is important and complx, and itslf mrits a rsarch ndavor, which w hop to undrtak in th nar futur. at cr in di d CO OI 1w Ill n. a an ha No s,j

3 ROBERTO B. M. MACEDO Univrsidad d Sio Paulo a 1) n ic a A Critical Rviw of th Rlation btwn th Post-i 964 Wag Policy and th Worsning of Brazil's Siz Incom Distribution in th Sixtis 51 Is V al n at 'S, S d 1- Sinc 1964 th Brazilian govrnmnt has pursud a wag policy that has attractd considrabl attntion in th litratur. In particular, it has bn crditd with th worsning of Brazil's siz or prsonal incom distribution in th sixtis by, among othrs, Fishlow (1972), Hoffman and Duart (1972), and Bar and Bckrman (1974). It is th purpos of this papr to discuss som of th aspcts of that policy and its rlationship to this dtrioration. In rviwing som of th xisting studis, w found that, both from th concptual and mpirical points of viw, th post-i964 wag policy and its rol in shaping th Brazilian siz incom distribution in th sixtis rquir furthr xamination. Aftr taking into considration svral of its aspcts not hrtofor discussd in th litratur w bcam convincd that th wag policy has not bn nutral in its distributiv impact and that this than that implid by th impact is of a much mor complx natur particular groups of wag arnrs analyss rviwd. It will b shown that hav bn clarly affctd by th wag policy. Howvr, on th basis of NOTE: Part ot th matrial in this papr as prsr:d in a papr writtn with Pdro Cipollari and in São Paulo. Th uflior wishs to rmsntd at th IPE-NBER Sminar on Indnation, Fb 26-28, t975, for conimts and thank Pdro cipollari, Adroaldo da Silva, Robrto Fndt Ir.. and Migul Broda SugRstior, 117 L

4 I Robrto 13 M M th xisting vidnc on clnhiot conclud that th IlOflflutrd(ity 01 wag policy has hnri ispons! bin tor th ()l)lrvn(l chang in ti 0On1 incom distribution by siz in th sixtis. I h I ink I)t%ri th toq phnomna is tar mor coriipiic atd than w hav hnri ld to l)iicp th1 far. Morovr, th ffcts of svral othr factors mak it vry diffic0j isolat th impact ot th wag policy a rid ('V(1 U1 t( its rd tt i \' i 1tiport,1ri For th purposs of this analysis w divid th l3raiiliari wag policy into thr aras: (1) minimum wags; (2) collctiv wag rad justrnns mr ing from th lgally constraind bargaining procss l)ct\v'n rnpfovr. and labor unions; and (3) wags and salaris mor dirctly undr govrp mnt controlthos of public srvants and workrs in pul)lic ntrpriss public utilitis, and/or firms subsidizd by th govrnmnt. Sctions i IL and Ill of this papr discuss ach of ths thr aras snaratly Sction prsnts sonic concluding rmarks. [I] THE POLICY WITH RESPECT TO MINIMUM WAGES Th sris on ral niininiuuil wags aftr 1964 is probably th n1os publicizd data st rlatd to th l3razi ian conomy and will riot t rpatd hr. Whatvr pric indx is us(l, th xisting data show that ral minimum wags prsnt a dclining trnd aftr 1964; this is accpti as an unqustionabl point) Minimum Wags, Wags, and th Incom Distribution From this fact, howvr, svral authors hav concludd that ral wags in gnral hav dcrasd and that this is on of th rasons for th worsn ing of th incom distribution in th sixtis.2 This argunint S not offrd ir a thortical modl linking changs in minimum wags to changs in wags and to changs in th incom distribution; apparnty, th rationa' bhind it is that th rstraint on niinimurn wags in th sixtis ha constraind th incom of popl in til lowr brackts ot th incom distribution, thrfor incrasrng th dgr ot inquality in th lattr. \ closr look at th problm, howvr shows that this conclusion cannot takn for grantd. Our first point draws its concptual basis from a crtain dualism ncountrd in th Brazilian labor markts: th coxistnc of formal arid inforrna mploymnt rlationships Th formal markt is, in broad lins, charactrizd by rlationships of mploynint that ar rlativly stabl, rguiati by law, and that pay rlativly highr wags. Th informal labor markti charactrizd by unstabl and low-incom Occupations and includs

5 Brazil's Wag_Policy 119 p 0 us to. to iv ost b hat td in rgrs ros, ndin S 10 al has om r. A tb [ma' 0 Ufl- rac- Ia td t is ids, among othr groups, urban and rural workrs without rgular jobs, th slf.niployd, and doiiistil cvdiits. Th rlrtic to ths concpts is ncssary hr bcaus mininlum wags in Brazil actually hold poor only for wag arnrs in th formal markt. Evn in th cass thortically covrd by th minimum wag laws thr is th phnomnon of noncomplianc, known to occur spcially in th rural sctor as wll as in th urban aras of th mor backward rgions. Sinc w will b focusing on th siz incom distribution, it is also worth mntioning that in th group of thos rciving incom from sourcs othr than wags thr ar many whos mony incom is not ncssarily qual to or abov til minimum wag. (This is th cas, for instanc, with som groups of farmrs and rntirs.) Th implication is that th lgal nhinimurn wag is not ncssarily th sam as th minimum montary incom, and that thr is a larg diffrnc d facto btwn th masurs of ths two concpts. A rcnt survy of Brazilian housholds, covring 26 million popl with montary incom, showd that 28 prcnt had a monthly montary inconl blow half of th lga minimum wag and that 52 prcnt rcrvd up to th lgal minimum! ihus, it is vidnt that thos dirctly affctd by th minimum wag lvls ar not thos at th vry bottom of th incom distribution. Evn if w assum that til minimum wag could b usful as an instrumnt for incom rdistribution, a larg group of low-incom rcipints would b outsid its dirct covrag. On could argu that th rstraint on minimum wags has causd losss to thos around th middl and bnfitd thos at th top of th incom distribution, so that th ovrall impact of th minimum wag policy has rmaind rgrssiv. This argumnt, howvr, ignors th nossibility that highr minimum wag lvls could hav causd advrs mploymnt ffcts for thos at th bottom of th incom distribution. Highr minimum wags, bing a constraint on th wags stablishd for formal rlationships of mploymnt. could hav bnfitd thos abl to find jobs at ths wags and causd losss to thos lft unmployd or forcd to accpt lowr-paid occupations outsid th formal markt. Thrfor, it can b sn that no analysis of th distributiv impact of th minimum wag policy can h mad without paying attntion to th rlativ impact of th policy on mploymnt in th formal and informal labor markts. This has not yt bn don in Brazil; hr w do not intnd to go byond th conclusion that on cannot trac th obsrvd changs in th ovrall incom distribution to a st of figurs on ral minimum wags. Ill any cas, w want to pursu this still furthr. A scond point that can b raisd is that, whil th lvl of ral proportion of workrs minimum wags has dcrasd sinc 1964, th rciving minimum wags in th urban formal markt has also apparntly

6 120 Robrto B. M. Ma Cth dcrasd. Most of th annual data on urban wags in Brazil conic th forms submittd by firms ach April to coriiply with th rquirm1 th ''Law of Two-Thirds." This law rquirs firms to prov that at last two-thirds of th workrs on thir payroll ar Brazilian Citizns, and th forms list nam, citiznship, and monthly wags of ach mploy, among othr things. Bacha t al. (1972) utilizd th publishd data from th; forms to dtrmin trnds in th proportion of workrs rciving minimum wags by mans of rlating th distribution classs to minimum 'ag figurs. Thir conclusion, on th basis of data for th stats of Guianabara São Paulo, as wll as th country as a whol, for th priod ] was that this proportion showd a dclining trnd in that priod. For th stat of São Paulo thr is vidnc that vn in th agriclijtu1f sctor th minimum wag has bn losing importanc. Tabl 1 prsnts a comparison btwn th avrag monthly wag paid to a typical ruraf workr, working on a pr dim basis, and th minimum wag in thcjt,0f São Paulo, for th priod It can h sn that th ratio of 1h. two sris shows a rising trnd ovr tini and that in 1973 th minimum wag was surpassd in th agricultural sctor of th stat. Th rsults shown by Bacha t al. (1972) and on Tabl 1 rflct StruCttà changs xprincd by th Brazilian conomy in th last dcad. As th rsult of th xpansion of industry and srvics, th rlativ siz of th "labor surplus" availabl for th simplst occupations in th urban aras has bn rducd. Th fact that th riininiuiii wag has bn losrn importanc is du both to th dclin in its ral valu ovr tim and to th diminishd importanc of institutional wags in a tightning labor markt. ft is tru that this procss has bn concntratd in th stat of São Paulo and in th southrn part of th country. In othr rgions, howvr, th phnornnon of noncomplianc casts doubt upon th rlvanc of ih lga' minimum as an actual lowr bound to wags. A third point xamins th maning of th loss implid by th fall in th ral valu of minimum wags in th sixtis. A group of workrs would ha lost ral incom in this cas if thy had continuously rcivd minimum wags for a priod up to a whol dcad. This would man that thy wr not abl to improv thir position in th arnings scal abov th lvf o' minimum wags. But this is not th way labor markts oprat. W ha vidnc showing that intrnal labor markts ar important in Brazi workrs go up on occupational laddrs which incras s'ags with th lngth of srvic in th firm, with a larg part of th skills 01 th Braziiia labor forc obtaind through on-th-job iraining. It is difficult to bli that in th formal sctor covrd by th minimum wag l,is th pcop rciving minimum wags in 11)70 ar th sam as thos who rcisc minimum wags in Morovr, thr is no guarant that thoc mployd at th minimum wag lvls of 1970 would b mployd ith S

7 rc)m S of ast th ong TABLE i Yar Stat of São Paulo: Comparison btwn Monthly Wag Rcivd by a Typical Rural Workr and Minimum Wag in th City of São Paulo, (annual avrags) Rural Workr's Wag Cr$ (1) Minimum Wag Cr$ (2) (1)/(2) urn ag ara, 969 tural flts a rural ityof hs mum tural s th I th aras osing o th kt. It and nomlgal in th hav mum wr vl of hav razil: h th zilian liv )opl civd thos if th instiwlo d Econonia Agricola do Estado d São Paulo, PognOsiico 75/76. São Paulo: SOURCES: , p Cor,junwra Econômica 29 (January 1975). minimum wags wr highr. Thrfor, th loss causd by th drop in th ral valu of th minimum wag cannot b unambiguously dtrmind xcpt undr particular conditions. Following this lin of rasoning, w hav idntifid a group of popl who hav suffrd such losss: thos who rciv transfrs, spcially pnsions and rtirmnt allowancs, from th Brazilian fdral social scurity systm. Ths transfrs hav bn tid to minimum wags or to th indxs discussd in th nxt sction of this papr. In both cass, th rsulting indxation laggd bhind cost of living figurs in major parts of th priod aftr Bing outsid th labor markt, th pnsionrs and rtird popl hav bn affctd by th wag policy sinc thy do not hav th sam chancs, opn to thos in th labor forc, of improving thir wags in th occupational laddrs of th markt. Minimum Wags and Indxation On could ask why, aftr all, th govrnmnt has pursud a policy of rstrictd minimum wags. On th on hand, it sms that in pursuing an anti-inflationary policy th govrnmnt has accptd th ida that mini-

8 $ 122 Robrto B M Ma iiiuiii wags could hav nfl mipact on intlati()il, ithr by a CO5t.p mchanism and/or b' its ffcts on th xl)c(tatlons with rgaril futur rat of inflation. On th othr hand, th illiflimuni Wag lvls ha incrasingly bn usd as a nl(hanism of i ndxation, ithr dfinci b, laws or informally stablishd, Covring a wid gwup of itms from and mortgag paymnts to traffic fins. This shows that in addition to wags and transtrs froni th govrnm thr ar othr sourcs of incom affctd by minimum Wag lvls that th impact of th minimum wag policy C1fl b analyzd also 1om th xpnditur sid, givn th fact that som prics in th conomy hav indxd to minimum wags. On th whol, th lsson is that an anaisjc1 th distributiv impact of th niinimuni wag Policy cannot b limitd to minimum wag arnrs as such. Early in 1975 th us of minimum wags as a basis for indxation carr to an nd. Until thn thy had bn th basis for i ndxatjon most ijki', to b affctd by govrnmnt guidlins, sinc th govrnnlnt uss its os,n discrtion in dtrmining thir lvls.6 This discussion of niinirnu Wags as an indxation mchanism points to th fact th Brazilian indxaj0q systm is not lft to oprat to its fullst xtnt, bing at last oarfl a rflction of govrnmnt guidposts. On th s'hol, th minimum waks ar quivalnt to a sris of undrstimatd pric indxs; in th nd thy cam to b viwd by Brazilian policymakrs mor as indxs than as wags. liii THE POLICY WITH RESPECT TO COLLECTIVE WAGE READJUST. MENTS Som Basics on th Policy W may bgin by dfining th sop of this branch of Brazil's wag po1 As it stands now, ii covrs th urban workrs undr th systm of th Consolidation of th Labor Laws (CL). This mans that it affcts svorknir th forriial urban sctor xcpt publft srvants (th lattr ar subjct to diffrnt rgulations). It also covrs th workrs in public ntrpriss, th is, th public sctor organizd as corporations. Th covrag of th program was broadnd in th cours of tim. In th bginning it comprisd solly workrs in public ntrpriss and/or public utilitis andor firms subsidizd by th govrnmnt. Policy critria wr constantly - tndd until thy rachd all urban workrs undr th CLL. Turning to th way th policy olwrats, it should b notd at th outt that in Brazil thr ar no collctiv labor contra( ts, that is, contracts L

9 I BrazilS Wag policy 123 hich a firm dals with c labor union to ngotiat labor srvics to b 0idcd by a group of tlfliofl mmbrs. Nvrthlss onc an indi'idijal is rnployd h is placd, undr a st of public rgulations, within th jurisdicti0fl of a particular labor union which rprsnts th workrs as a group. Th major issus dalt with by th labor unions ar collctiv wag radjustnllflts primarily dsignd to compnsat workrs for inflation. On th mployr sid, th firms ar similarly placd by public rgulation undr th jurisdiction of an association of firms that rprsnts thm as a group. Thus, th bargaining procss taks plac btwn labor unions and associations of firms. Prior to 1964, th radjustmnt rats wr ngotiatd fr of govrnmnt limitations. Th high rats of inflation and th political agitation that followd th rsignation of Prsidnt Janio Quadros in 1961 mad th ngotiations incrasingly difficult, and striks by th major unions bcam commonplac in th priod Ths striks wr o crtainly on of th ingrdints ol th Political frmntation that ld to th n mihtary takovr of Th nw govrnmnt took stps in th dirction of avoiding th social n and political turmoil involvd in wag radjustmnt ngotiations. Excpt for a a vry insignificant numbr of cass, striks wr forbiddn and collctiv wag radjustmnts in th ara covrd by th policy bcam bound by monthly indxs publishd by th govrnmnt. Ths indxs rfr to V Iannual rats to b obsrvd in ach month's radjustmnt. For instanc, bank clrks hav thir radjustmnt in Sptmbr; if th indx for Sptmbr is 130, thy ar ntitld to a radjustmnt of 30 pr cnt. In th priod th strongst unions wr abl to obtain rad justmnts on a six-month basis, hut sinc 1964 radjustmnts for a priod shortr than on yar hav bn rlild out. T. Th systm oprats as follows. Th National Wag Dpartmnt informs th labor courts of th rat of wag radjustmnt to h obsrvd in court cass. In cas of disagrmnt btwn workrs and firms as to th rat, th cas gos to th courts, which cannot grant incrass abov th lvl y. stablishd by th National Wag Dpartmnt. Sinc, as a rul, th labor h unions ask for rats of radjustmnt highr than th official rats, th cas gos to th courts, which dcid by following th rat stablishd by th to govrnmnt. I Th rats stablishd by th govrnmnt ar coniputd by a formula th h I dtails of which can h found lswhr.8 \ivhn it was first stablishd, th 1- basic lmnts of th formula wr; (1) an indxation mchanism dsignd valu, on th basis of tor I to rstor th ral wag of th workrs to its avrag half of th rat of cx- th last 24 months prior to th month of radjustmnt; (2) inflation xpctd in th following on-yar priod; and 3) th annual rat st of incras in th national avrag productivity ijr workr. in Two major changs hav occurrd in th formula sinc it was first I

10 124 Robrto B. M. MaC(J0 introducd. Unti 1968 th xpctd rats of inflation sti matd govrnmnt..., th scond k'rnnt of th formula, Wr U lirajistic 'nd consistntly blow th rats of inflation that actually Occurrd undrstimation brought complaints from th labor urloris and in 1q68 an Such attmpt was mad to corrct it by rllans of a modification in th forniuja Putting it in rathr simpl trms, th nw Iorrnul,i thn adoptd providd with an automatic mchanism for corrcting an undrstimatio of th xpctd rat of inflation in th prcding radjustmnt Thus stablishing th nw rat of radjustnint, rathr than whn Considring actually paid during th priod in which th latst 'sags ra(ljustn-1 was in ffct, th ngotiations considrd thos wags that Would hav bn if th xpctd rat of inflation usd in th paid calculations had coincidd with th subsqunt actual rat of Prcisly inflation. Th scond major chang occurrd in January I 975, whn th bas priod for rstoring th ral valu of th avrag wag was rducd 24 to 12 months. This was don bcaus, aftr from a Priod of diminishing inflation, its tmpo acclratd again in 1973 and, basd on an avrag of 24 months, th rats of radjustmnt laggd far bhind th incrasing of inflation. rat In addition to ths changs in th formula as such, its application bn subjct to govrnmnt has intrfrnc of various othr living indx that sorts. Th cost of srvs as a basis for th indxation nichanisni of th formula is an avrag of rgional govrnmnt indxs that ar affctd by thmslvs govrnmnt intrfrnc. Furthrmor, th difficultis involvd in computing th rat of incras in avrag national productivity anothr lmnt of th formula, hav mad this rat subjct to ad-hoc stimation, In viw of all th problms surrounding th formula and th computation of its componnts, it is not surprising that th rsulting hav rcivd strong radjustmnt rats criticism. It has concntratd on th qustion of whthr or not th govrnmnt's rats hav bn clos th cost of living plus to actual changs in gains in productivity, Hr Thr is no ar th major points:9 (1) convincing justification for adopting th formula th whol, it is as such; on a complicatd mchanism for justmnts to subjcting collctiv rad- govrnmnt guidlins Th a basis for th adoption of a 24-month priod as rconstruction of th ral to b applid is wag at th tim th policy bgan considrd a dvic dsignd to rsult in low rats of radjustmnt (2) As a rsult of th 24-month rul of th xpctd and th undrstimation rat of inflation, th rats of radjustmnt blow cost of living wr prsistntly figurs until (3) From 1968 on, th rats hav matchd cost of living figurs mor closly in Productivity, but hav not incorporatd gains As notd abov, in arly 1975 th As a rsult, th formula undvnt a major chang rats of radjustmn authorizd in 1975 hav bn slightis

11 Brazil's Wag Policy 125 of th cost of living figurs. For th whol abov thos priod; howvr, th govrnmnt indxs sm to indicat that th rational bhind th policy was on of rstraint on th rats of radjustmnt authorizd by th govrnmnt. n S n of n y fls. y Th Maning of th Rstraint Imposd by th Wag Policy Th prfunctory attntion w paid th analysis of th govrnmnt's formulas and indxs was intntional. W ar convincd, for rasons to b xplaind blow, that on cannot judg th impact of th policy by simply looking at ths formulas and indxs. It will b shown that thy do not ncssarily impos a binding constraint on ithr actual rats of radjustmnt or th absolut lvl of wags obsrvd in th markt. In fact, th wag radjustmnt rats calculatd pursuant to th formula cannot b considrd as an uppr or lowr limit that cannot b xcdd. On th on hand, in spit of th fact that collctiv wag radjustmnts ar subjct to th policy, th firms and workrs ar fr to ngotiat wag radjustmnts abov thos stablishd by th formula, on an individual basis. Th firm can also xtnd this practic to all its workrs if it fls that it is ncssary to do so. In such a cas th only risk is that firms subjct to th guidlins of th Pric Control Board (gnrally larg firms in th manufacturing sctor) will not rciv approval for pric incrass driving from collctiv wag radjustmnts grantd abov rats dtrmind by th wag policy. In thory, thy will hav to absorb th diffrnc by mans of improvmnts in labor productivity. In practic, th Pric Control Board follows ad-hoc procdurs, th ffctivnss of which, in trms of pric and wag controls, rmains to b dtrmind. On th othr hand, th wag policy dos not prvnt a firm from firing workrs if it finds th nw wag lvl rsulting from th wag policy mchanism to b abov th valu of th workrs to th firm, nor dos it prvnt workrs from laving th firm if thy considr thir wags blow what thy could b arning lswhr. Thrfor, th wag policy can b viwd, in practic, as dtrmining th minimum rat of wag incrass for prmannt mploys. Undr ths conditions it bcoms vidnt that th alrady-mntiond policy of stting yarly rats of incras blow th rat of inflation, or blow th rat of inflation plus productivity, is particularly dtrimntal for mploys that th minimum rat of incras dtrmind by th wag linkd to thir jobs by stabl mploymnt rlationships so policy bcoms th only radjustmnt thy obtain. Th qustion ariss whthr sizabl groups of workrs find thmslvs in groups can b this situation. In th nxt sction, it will b shown that som singld out as particularly affctd by th wag policy in this fashion. On t

12 b 126 Rot,'rt(J 13 M th whol, howvr, it should h pointd out that,1(tual ra t ut radjustmnt ar not ncc'ssari ly thos sthiislid by th l)oli Firct, labor turnovr in Brazil i larg nough to 0 'II harrir official and actual rats 01 radj ustmnt. Th data Ol)tdind btss0 'Law of Two-Thirds'' rvald, br instanc, that through th 36 pr( cut ot thosc mployd in th ma riutacluring sctor of th stat 01 Siu Paulo fl 197Q had lss than on yar of srvic in th uirrn, and 60 lss than two yars. 10 In gnral, prcnt had th collctiv \\'ag "agrmnts'' stat that mploys with lss than on yar in th firni ill hav a radjustmnt on th basis of th official rair' but thir lngth of srvic in th firm. In any cas, th Propoional to wag ngotia by th individual whn ntring th firm (th basis for this radjustn),11) is ngotiatd btwn th workr and th firm at that fri tim and can li abos or blow th wag rcivd in th prvious niploymnt Givc'n th hih rats of turnovr, aftr a fw yars it bcoms difficult to to what th individual's wag has bn altctd by xtnt th wag policy xtnt by th nw wags ngotiatd whn and to svhat moving from firm to firm A scond point is th xistnc, mntiond abov, Of markts in intrnal labo' Brazil. This mans that th individual workr has highr wags by mans of accss to iniproving his position on th occupational laddr of his firm. Onc thr is a group of stabl fllploys in th firm thy will rciv at last th mini mu iii radj ustnint stablishd by wag policy. Thrfor, to stablish and th nliainta in a wag structur of th typ usually ncountrd in th intrnal riiarkts, th firm will hav to from tim to tim grant wag radjustmnts abov thos of th official indxs at last a part of its labor forc. to Thus, turnovr and stability ar important lmnts in th analysis of th wag policy, sinc thy mak actual radjustnints not ncssarily thos dictatd by th official qual to rats. Turnovr implis that abov or blow th lattr, th formr can whil stability, within a hirarchical wag structur, implis th possibility of wag radjustrnnts In sum, our abov th official ratm contntion as in th cas of nlininluni wags, is that ffctivnss of th policy, th dsignd to impos guidlins, is limitd by th opration of labor markt mchanisms W hav shown rats of radjustmnt that th actuj; can b abov or blow th govrnmnt so that th indxs stablishd by th impact of th wag policy an mpirical qustion. on ral wags bcom W thus Procd wags in th priod to discuss th vidnc for r bfor impact of th rturning to th qustion of th wag policy on th sixtis. Brazilian siz incom distribution in th Th Evidnc for Wags In addition to ral minimuni wags, sonic studis hav usd axrag oag Pr workr in th manufactiring sctor in th sixtis dtlatd by cost 0' 3

13 Braz!l'S Wag Policy 127 lying figurs, as a basis for showtng th mpa(i at th wag policy.' Th nlalor argumnts lot this ar that (1) tor th priod as a 'hu)u, and particularly aftr 1968, ral avrag wags hav shown an incrasing trnd 1lthough th ovrall rat of incras has bn blow that 0) productivity du to th rstraint on wag I iiiposd by th wag policy); and (2) ckiring th priod , avrag wags rniaind constant or dcrasd. Sinc this priod th argumnt gos, coincids with that in which xpctd rats of injlation hav bn undrstimatd in th application of th collctiv wag radjustmnt formula, this slackning in th growth of ral avrag wags is also th rsult of th wag policy. Tabl 2 prsnts indxs of ral avrag wags in th nianufacturing sctor in th sixtis (1959 = 100), computd on th basis of thr cost of living indxs, th gnral pric indx, and th wholsal pric indx for industrial products. Our discussion of this typ of vidnc will focus on concptual problms associatd with th us of avrag wags and th mpirical difficultis bhind th intrprtation of th Brazilian data on avrag wags in th manufacturing sctor in th sixtis. Avrag wags hav bn so widly usd as a masur of wags that som of th problms involvd in this ad-hoc procdur hav bn lost 0 0 C. i s h 0) TABLE 2 Brazil: Manufacturing Sctor, i 970, Indxs of Ral Avrag Wags pr Workr (1959= 100) Yar (1) (2) (3) (4) (5) altrnativ dflators: (1) cost ot NOTE: Th indxs ar computd with th following Paulo, compuid by DIEESE, a labor living, Rio d Janiro; (2) Cost of Living, São union rsarch institut; (3) Cost of Living, São Paulo; (4) Wholsal Pric Indx of Industrial Products; (5) Gnra! Pric Indx. Dflators (1), (2), (4), and (5) publishd monthly by th Gtulio Vargas obtaind from Conjuntura Económica, Foundation, Rio d Janiro. and cnsuss of manufacturs, SOURCE: Raw data on avrag wags obtaind from survys publishd by Fundaç5o Instituto Brasiliro d Gografia Estatistica, Rio d Jani ro

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15 BralilS Wag Policy 129 A fifth argiifllnt tiirgs dirctly Irom Our Prvious dan that th wag policy dos not np(csarily ifl1)()sc a constraint on th ril)prat,oil of markt mchanisms of wag dtrmination. An ovrviw of th labor markt in th sixtis wi I b prsntd blow in ordr to luciolat how th forcs of supply arid dmand might hav affctd wag dtrmination iii th sixtis. Lt us now rlat som of th points dlscussj abov to th ovrall prformanc of th Brazilian conom' in th priod undr discussion. Th basic point is that this prformanc, although charactrizd by an imprssiv ovrall rat of growth, was charactrizd by th occurrnc of businss cycls. Th yars of wr a priod of rcssion or slack growth, whras th priod from 1967 on was charactrizd by boom yars.' In th first priod, th conomy xprincd sluggish mploymnt and vn unmploynlllt in som sctors. Not that th priod whn ral avrag wags wr found slackning or dcrasing ( ) roughly coincids with th yars of rcssion or slow growth, whras th priod of incras in ral avrag wags starts with th boom yars. It is against this background that w can now pic togthr th argumnts dvlopd abov with rspct to th vidnc on ral avrag wags: th figurs in Tabl 2 ar consistnt with svral hypothss which casts doubt upon thir significanc as indicators of wag policy ffcts alon. Th basis for this argumnt is twofold. On th on hand, th prformanc of ral avrag wags in th priod , although consistnt with th hypothsis that it is a rsult of th wag policy, is consistnt with th following as wll: (1) lowr wags driving from markt conditions charactrizd by a slackning dmand for labor, and (2) a probabl rduction in th numbr of hours workd pr man during that priod. On th basis of th third argumnt raisd abov, avrag wags should h highr in rcssion yars sinc th wags of th laid-off workrs ar blow avrag. Th fact that an incras is not found in 1965 could b th rsult of th countracting ffcts mntiond in (1) and (2). On th othr hand, th prformanc of avrag wags aftr might hav hiddn or lssnd th ffct of th wag policy sinc it rflcts highr wag rats driving from a markt which bcam tightr and lss bound by th wag policy constraints and/or an incras in th numbr of hours workd pr man, a phnomnon which is likly to occur in boom yars. Th following hypothss ar also consistnt with th bhavior of avrag wags aftr 1967: (1) if it wr not for th wag policy, thy would hav grown fastr; t2) th.y hav incrasd bcaus th govrnmnt corrctd th formula for th undrstimation of th xpctd rat of inflation; mploymnt in th (3) thy hav not grown fastr bcalis xpansion in modrating th lat sixtis occurrd mostly at th lowr lvl 101)5, thus incrasd rflcts rising trnd in avrag wags; (4) th fact that thy hav xpansion of th industris paying highr wags.

16 S 130 RobrtoM Macd0 Lt us now so nìina Ii Z 0111 a rgu tiwnts U p to this ( d lit. Th I )havk)i f avrag wags pr workr in th Brazilian manhlta(ttjrjn r sixtis is a phnomnon altc td by svral (actors, oni ot Wlijdi Wr mntiond abov. Until thir partial ffcts ar disntangld, ()I1(' Or) thin ic whn trying to infr particular conclusions Ircmi th xisting da Finally, it should h notd that, whil w hav bn talking about avrag wags, following currnt usag, what w actually hav avaj abl ar figurs on avrag arnings. Wlls (1974) and Bacha (1975) ha; suggstd that th wag policy can caus rgrssiv ffcts within th distribution of arnings as xcutivs and blu-collar workrs in high hirarchical status hav improvd thir positions in th arnings structur rlativ to thos in th lowr lvl jobs whos bargaining position has l)n waknd by th inffctivnss of th labor unions. This shows that th figurs on avrag wags, bsids bing pron to ambiguous intrprta. tions, hav a limitd usfulnss in th analysis of th distributiv impact of th wag policy, sinc th typ of rgrssivnss pointd out by Hacha and Wlls could hav occurrd with incrasing or dcrasing avrag wags. Of cours, with th wag policy affcting wags as a whol th probp would b mor srious. Th Impact on Incom Distribution Lt us suppos, for th sak of argunint, that additional rsarch would lad to th unambiguous conclusion that th wag policy has gnrally rstrictd growth in ral wags in th manufacturing sctor as wll as othr covrd sctors. Could on infr, thn, that this could b a factor xplain. irig th worsning of th Brazilian siz incom distribution in th sixtis? Som of th xisting studis hav givn an aluirniativ answr to this qustion on th basis of what sms to b simpl intuition. In actual fact, howvr, th link l)ttvn th two phnomna is not that simpl, as w now procd to dmonstrat. First, lt us look at th concpt of ral wags to b adoptd in th discussion. As Tabl 2 indicats, th rsult donds vry much on th ifl(lx chosn to dflat nominal wags. lt can b sn from that tabl that, in gnral, cost of living indxs lad to lowr ral wags than gnral pric indxs or wholsal pric indxs for th manufacturing sctor. Thrfor, to go from thos who hav lost to thos who hav gaind is not a simpl task. What ths indxs show is that som itms thai hav an important wight in th cost of living indxs hav xprincd fastr Pric incrass than thos in th industrial sctor and th gnra I I)r!c indx ol th conomy Lt us considr, for xampl, two important itms in trms of cost of living changs: food and srvics, For ths groups it WoUld b ncssary to analyz how th pric changs ar translatd into th prsonal

17 I Brazil's Wag Policy 131 distribution Within th agriniltiir and Srvic sctors. Th fact that nçom th most important prics in tirms 01 Cost 01 living indxs ar som of prics rcivd bygovrnmnt ntrpriss (.g., in lctricity, administ ful, watr supplis an(l url)an transportation) complicats th problm vn furthr, sinc this would involv th rol of th govrnmnt in stting incofli distribution from th point of viw of its pricing and th prsonal policis a problm not yt invstigatd in Brazil. It is important to niphasiz that th prics in th ara undr dirct govrnmnt xpnd1tu control wr havily subsidizd bfor 1964 and that thir incras sinc wll abov th avrag rats of inflation, thus making th thn has bn govrnmnt sctor a gainr in trms of pric incrass aftr Intrsctoral diffrncs in th rat of pric changs thus pos a major drfficulty for th analysis of th rlation btwn wag policy and prsonal incom distribution Laving asid th problm of dflating wags, lt us turn to a particular cas, th manufacturing and mining sctors. W assum that, du to th impact of th wag policy, wags hav laggd bhind profits within ths sctors. This brings us to a scond point of our discussion. A rcnt analysis of th largst 318 corporations in ths sctors has shown that, in 1972, public ntrpriss accountd for 35.4 prcnt of thir total nt worth, multinationals, 35.4 prcnt, and privat Brazilian ntrpriss 24.2 prcnt.6 Thus, a major part of th sctor's profit shar would go to th govrnmnt and to forignrs, laving th impact on prsonal incom distribution unclar: th incom accruing to forign capital dos not ntr into th Brazilian siz distribution of incom, whil th incom going to th govrnmnt is distributd through xpnditur, which brings us again to th problm of how this xpnditur affcts incom distribution. A third point is that, in gnral, in sctors whr corporations prvail profits ar oftn not distributd to asst holdrs and thrfor do not ncssarily appar in th data from which th siz incom distribution is analyzd. Finally, as in th cas of minimum wags, w think it important to look at th position, in th siz incom distribution, of thos affctd by this covrd b' th lattr ar branch of th wag policy. Sinc th sctors within th urban formal markt and, on avrag, pay wags abov th minimum, th position in qustion is abov th avrag of that distribution. Thus, w ar talking about groups of popl not at th bottom of th incom distribution and, furthrmor, if thy hav rlativly lost position in th sixtis, it is not clar, for th rasons xplaind abov, how th gains would appar in th siz incom distribution. Scondly, th wag policy may hav had an impact on mploymnt in th covrd sctors, aract!ng popl from othr sctors whr thir incom was lowr du to unmploymnt or undrmploymnt. For ths popl th concpt of loss could b qustiond.

18 I 132 Robrto B. M THE WAGE POLICY WITH RESPECT TO PUBLIC SERVANIS AN WORKFRS IN PUBLIC ENTERPRISES AND/OR PUBLIC AND/OR FIRMS SUBSIDIZED KY THE GOVERNMENT UTftITIES It is in this ara that th wag policy has had th clarst inipact on wags Thr main factors ar rsponsibl: th ovrall conomic policy foii by th govrnmnt, th particular forms assumd by th mploymnt rlationships in this ara, and som intricacis of this branch of th policy. Wag Public Srvants Th cas of public srvants must b put in historical prspctiv Until th arly sixtis jobs in public srvic wr favorably rgardd in th labor niarkt. Salaris paid in ths jobs wr clos to thos ncountrd in th privat sctor for similar occupations. Morovr, th fring bnfits clarly mor plntiful in th public wr sctor: arlir tnur rights, lavs of various sorts, mdical assistanc, arlir rtirnint, bttr pnsion and so forth. plans, Th distribution of mploymnt in th public sctor was highly rgardd by politicians as a mans of obtaining political prstig, and, as a rsult, govrnmnt payrolls bcam incrasingly inflatd. Th fdral was facd with prsistnt dficits, financd govrnmnt by mony cration, and th Incrasing payrolls wr on of th lmnts contributing to ths dficits. It is wll known that th govrnmnts aftr placd a strong mphasis on th control of inflation and on conomic growth. Givn its inflation (through th inipact on govrnmnt dficit) and on cononhic (through th rstraint growth imposd on public invstmnt), control of govrn. mnt payrolls bcam a primary targt of th post-1964 conomic policy. As a rsult, th radjustmnts grantd to public srvants cam to lag bhind inflation indxs. This ovrall viw is supportd by th data prsntd in Tabl 3. It shows a comparison btwn changs in th salaris of fdral civil Srvants and changs in th valu of th minimum wag in Rio d Janiro. Thr 18 "rfrncs" in th wr Fdral Civil Srvants' Salaris Scal (FCSSS) in 1960 and 22 in 1964 and 1970 Coniparisn has bn mad in rfrncs 5, trmsot to, and 15. Minimum dats closr to th wag figurs wr obtaind for th dats whn th FCSSS rfrncs wr modifid. Th comparison is mad in th last two columns purpos of showing th of th tabl and, for th impact of th priods ar highlightd: post1 964 wag policy, two distinct and It th first priod th is clar that in radjustmnts of th FCSSS rat abov that of rfrncs wr mad ata th minimum scond priod.17 wag; th rvrs was th cas in th

19 TABLE 3 Salaris of Fdral Civil Srvants vrsus Minimum Wags Minimum Wag (1) Nw Valus-- (Cr$) (2) (3) Ratios (2)1(1) (3)/(2) FCSSS Rf. 5 FCSSS Rf. 10 FCSSS Rf k l800a 27.50a c ' If S. d It, P.1 S. is n iii y. d nd r in of h h Ct in ta th Minimum Wag in Rio d janiro SOURCES: As of 'As of 'As of As of 'As of r5 of t FCSSS rfrncs obtaind from th txt of IaW No (11/23/1960), t.aw No (6126/1964) and Dci-I-aw No (1/9/1970). Minimum wag figurs obtaind from Con)untura Económmca 26 (Novmbr 1972). Sinc it is wll known that minimum wags hav laggd bhind inflation aftr 1964, thr is no doubt that th FCSSS rfrncs hav had thir purchasing powr rodd in th priod. A study by th DIEESE (1975) has shown that rats of radjustmnt of th minimum wags hav bn blow th collctiv rats of radjustmnt discussd in Sction II. This implis that civil srvants obtaind th worst rat of radjustmnt of th thr branchs of th wag policy discussd in tiis papr. Thus far this papr has bn critical of th us of avrag and minimum wags as a basis for conclusions on th impact of th wag policy. W now claim that ths FCSSS rfrncs do not suffr from major ambiguitis in showing that th wag policy has causd ral salary losss to civil srvants of th fdral govrnmnt. W support this claim with th following argumnts, som of which mrg from alrady discussd in this points papr. For th privat sctor in gnral, it was pointd out in Sction Il that mandatory at th individual lvl. Salaris of civil srvants, howvr, ar th wag radjustmnts undr th policy ar not not ngotiatd at th individual lvl, but dpnd on salary scals. Thus, th rad justmnts thy policy orintd to wag obtain ar mor likly to b affctd by a wag changs for groups of workrs. Undr such conditions, th only possibility of obtaining radiustmflts byond thos stablishd for th salary scal is by mans ol promotion. On th basis of th information w obtaind by intrviwing a fw fdral civtl srvants, it sms that promotions did not occur n a scal larg nough to Compnsat for th low rats of radjustmnt. In fact, promotion schms

20 134 Robrto B M bcam thmslvs a targt of xpnditur control, with th rsult that promotions hav not bn mad rgularly. In gnral, th only ddtionai incrass byond thos of th radjustmnts øt th FCSSS ar sniorij allowancs, at th rat of 5 prcnt ach liv yars.8 Du to th xistnc of bnfits associatd with snr)rity and to th carr systm, civil srvants in Brazil ar a group with low rats o turnovr. W hav sn, in th analysis of Sction II, that ii1t(rtjrfl and intrindustry turnovr was on way of scaping th control of th wag policy. In th cas of civil srvants this 1)OSSibIlitV WlS not Opn. For all ths rasons, whras in th privat sctor th rat of radjustmnt stablishd th mini mum rat of radjustmnt for stabl mploys, in th cas of civil srvants th govrnmnt's rat bcam th rat of radjustmnt. Th analysis abov has bn limitd to th as of th fdral ciii srvants. It would b intrsting to xtnd it to mit ta rv prsonnl and public srvants at th stat and municipal lvls. As to th formr group thr ar indications that thy fard somwhat bttr than th civil srvants, but this is not a grat accomplishmnt.' It rmains to h sn whthr or not thy hav translatd thir nw political status into ral incom gains. With rgard to public srvants at th stat and municipal lvls, it should b notd that ths two lvls of govrnmnt lost most of thir autonomy aftr 1964 and hav bn subjct to th guidlins mrging from th conomic policy of th fdral govrnmnt. On th whol, w ar convincd that public srvants in gnral hav bn th group most clarly affctd by th wag policy; it taks only casual knowldg to prciv that jobs in th public srvic no longr hav th attraction of th pr-1964 ra. Workrs in Public Entrpriss and/or Public Utilitis and/or Firms Subsidizd by th Govrnmnt In addition to bing subjct to th wag policy formula discussd in Sction 2, this group has bn affctd by particular aspcts of th wag policy. Thy wr th first group to b covrd by that formula, which startd as arly as 1964, whras th xtnsion of th lorniula to th privat sctor in gnral was accomplishd only in This arly attntion is xplaind by th fact that th govrnmnt dficits ar affctd h'' th payrolls of ths firms via th govrnmnt outlays thy rciv as subsidis. Thrfor th control of ths payrolls also bcam a prim targt ot th post-1964 conomic policy, givn th rlation of ths dficits to th ovrall problm of inflation and growth. This group must submit rqusts for collctiv wag radustnints to th

21 I BralilS wag Policy 135 iional Co1iilcil on Wag Policy (N(V'P). Th CoLi ncil al(ilats th radjlistiiit0t by making th formula and thcn annual rats ot radjustmnt. In th cas of firms subsidizd by th govrnmnt, th concurring approval of th subsidizing agncy must l) obtaind authorizs th in addition to th aliih0ri7ati from th NCWP. policy had bn applid in this tashori for som tim ths Aftr Ih that thir wag and salary scals, rad justcl strictly on th firms ralizd basis of th govrnmnt indxs, wr lagging bhind th s\'ags arid privat sctor in gnral. lii coping with this problm ths' calaris of th bgan to ask th NCWP for wag incrass ovr and abov th official rats of rad justrflnt spcially in th cas of crtain particular occupations and profssions. Aftr an analysis l)y th tchnical staff of th NCWP such rqusts hav oftn bn approvd. In xami ru rig ths rqusts for byond th official rats, howvr, th NCWI acts in a vag incrass discriminatory was', ithr by th forc of othr wag policy rgulations or as a rsult of ad-hoc procdurs. Discrimination arising from th wag policy rgulations ariss in th following fashion. In xamining a rqust, th NCWP follows th rul of considring whthr or not th ptitioning firm has its own rsourcs to support th additional incras in its payroll. If it dos, th xtraordinary radjustmnt is mor asily grantd. This has obviously placd th workrs in th dficit-riddn ntrpriss, such as th govrnmntown(i railways and shipping lins, in th position of having thir wags bound by th official rats, which ar known to hav laggd bhind prics during major tim priods. Discrimination arising from ad-hoc c:ritria can b sn from th fact that ths xtraordinary radjustnunts hav bn disguisd in th shap of promotion plans and 'rclassification schms" varying from on him to anothr. It is also concivabl that th NCWP's dcisions ar influncd by th prstig of sonic of ths firms and th political powr ot thir dirctors and top xcutivs. In ordr to substantiat this part of ulir disc lissiori on 'oi.iicl hav to obtain data from ths firms, and this is not an asy task. Unofficial that workrs in railways and shipping as wll as longshormn hav bn tratd in th sam information mrging from various sourcs indicats mannr as fdral civil srvants, whras workrs in public ntrpriss in tlcommunications, and th aras of oil prospcting and rfining, mining, lctricity hav fard far bttr in trms of wag radjcistmnts. concliisioius with Although w hav not bn abl to draw mor prcis rgard to this particular ara of th 'ag policy. w ar convincd that of groups whos wag additional rsarch could lad to th idntification radjustmnts hav bn clarly rstrictd by th wag policy, as vil as of thos who s'r abl to vad ths rgulations almost ntirly.

22 I, 136 Robrto B. M Macdo liv] CONCLUDING REMARKS On th Concpt of Loss Arising from Wag Radjustmnts Attmpts to illustrat th ffcts of th wag policy on wags h Usual compard masurs of wags at isolatd points in tim. As ov shall this can provid only a partial and mayb not th most importalit PiCtliroj th vntual loss in ral wags arising froni collctiv radjustmnts givn to compnsat for inflation. Lt us mak th argumnt mor prcis. W assum that (1) th.nonhina wag rat rmains th sam btwn two Conscutiv rad justm5 and (2) inflation is continuously changing at th rat of 100 r Prcnt. Thn th ral wag loss btwn two radjustmnts occurring at points 0 and b L jnj(n/n, - ) ]dt whr L = ral wag loss btwn t = 0 and = x valuatd in trms of p which rprsnt th pric lvl of t = 0; = constant nominal wag rat; and r = continuous rat of inflation. In a priod btwn two radjustmnts, th ral loss thus dpnds, in a simpl way, on th lngth of th tim intrval btwn radjijstmnts on th rat of inflation, and on th lvl of wags at th bas priod. Th loss will b gratr th highr th lvl of wags at th bas priod, th longr th tim intrval btwn radjustmnts, and th highr th rat of infla. tion. Furthrmor, ovr a priod of yars. th loss will also dpnd on ho th wags ar rcomposd by ach radjustmnt. Thrfor, if on looks only at th ral wag at t = U and th radjustd wag at = x, two important lmnts ar bing nglctd: th lngtho th tim intrval btwn radjustnints and th bhavior of th inflation rat within th sam priod. Th implication is that vn incrasing rai wags btwn priods can hid sizabl losss occurring within th priods. Assum now that wag and pric controls ar important for bringing down th rat of inflation. In criticizing th post-i 964 'ag polic' on must rcogniz th inlplicatft)ns of th fact that th inflation rats in avragd roughly twic th avrag of th priod. In this rspct th abov formula shows that th loss causd by th rat o inflation bcam allviatd in th scond priod. Th fact that w ar talking about only on lmnt of th formula nds to b undrscord. In 1962 and 1963, for instanc, th strongst labor Unions wr abl to obtain radjustnints on a six-month basis. Anothr sourc of ral wag losss could manat from xpctafon rgarding th futur rat of inflation. If ths xpctations ar iniluncd b