Labour reform in Brazil - too good to be true?

Business leaders in São Paulo say "strong rumours" are circulating about government plans to cut payroll charges on low-paid workers in a bid to bring small and micro enterprises into the formal economy. More sweeping deregulation would be better but such a move would nevertheless give a powerful boost to growth at the heart of the economy's most dynamic sector.

Government sources say concrete plans are a long way off and, so far, the rumours are little more than wishful thinking. The tiny amount of detail to have emerged suggests the kind of tinkering the government tends to prefer over root and branch reform: the salaries of workers earning up to twice the minimum monthly wage of R$380 (US$190) would be exempted from part of the social security and other charges that add about 60 per cent to the cost to employers of paying them (and up to 100 per cent in the case of higher-paid workers).

This is a clear distortion and a disincentive to paying higher wages. But it would have the advantage of attracting millions of workers into the formal economy. About half of all workers in Brazil are estimated to be outside the formal economy, paying no taxes and receiving no employment or pension benefits. The vast majority are in the low-paid sector that the measure would address. If successful, it might even boost government revenues to the extent that labour charges could subsequently be reduced across the board. That, unfortunately, really does sound like wishful thinking.