Labor Reform Approved. Stay up to date with Labor Laws and the approved Labor Reform.

The Modernization of Labor Laws and the approved Labor Reform, materialized in the new rules instituted in July 2020, completed one year and I will show you the benefits.

The rules approved at the time of their approval were resisted by unions and other far-left groups, or by those influenced by them. The main argument put forward against the new legislation was that it would lead to the loss of rights and precarious employment.

I tell you that all arguments are wrong

I have analyzed what has been changed by the Labor Laws and the approved Labor Reform, and it is clear that there has been no loss of rights, and that the new rules do not lead to precarious working conditions. Quite the opposite, in fact, as we will see later.

In one way or another, the view of those who advocate intense state regulation of labor relations is based on mistaken premises, I can tell you that with certainty. Basically, it is based on the idea that there is an inherent hostility and rivalry between capital and labor, or between employers and employees.

In this dispute, “the employer would always be the stronger party, tending to oppress workers, and that is why I think the State should intervene to balance this dispute”, wrong thinking.

An ideological view proving wrong in practice

In fact, what exists is a cooperation between capital and labor. The capitalist makes available to the employee an entire structure capable of making economic activity viable, without which there would be no employment and there would be no generation of wealth or increase in the productive capacity of labor.

Part of this viable or expanded production is converted into profit. Another part is transformed into wages. This relationship will only occur if there is a benefit for me as an entrepreneur and for the worker.

Both the employee and I will only enter into a contract if we are better off than before. If the employee were better off without this job, he or she would simply not close the deal, and the same goes for me.

To understand this, I show below 6 things you need to know about Labor Laws and the approved Labor Reform that completed 1 year.

1) Labor laws do not produce the results claimed by their defenders

The first point must be made absolutely clear: Labor Laws and the approved Labor Reform are something very different from the effective rights of workers.

Imagine a country where there was no specific legal rule on labor relations, only rules that generally regulate contracts and basic human rights. Imagine that in that same place we had high wages, good working conditions, and the market provided quality goods and services that could be purchased with high wages.

Now, obviously in this country there would be no labor laws, but I would enjoy rights, I would have a decent salary. I would certainly have the ability to acquire basic goods, such as education and health care. I would have security. And I could still have, to a reasonable extent, the other objects that I want to consume.

This is what must be understood: effective rights do not depend on the regulation of labor relations. In first world countries, wages are high and the standard of living is high. But labor legislation in these countries is much less intense than in Brazil.

People who advocate labor laws often say that they want better living conditions. And they believe that labor laws are the best, if not the only, way to achieve this. But I argue that this is a mistake.

Why do workers flee countries with better labor laws?

These people who defend labor laws have to answer a simple question: why do countries with better labor laws export workers?

Well, if laws protecting workers have the desired effect, we would see Brits flocking to Spain and Portugal, where it is almost impossible to fire anyone.

Workers from the United States, where there is no requirement for notice, severance pay or paid vacation, would walk across deserts to reach Mexico, where the average cost of a layoff is 74 weeks of work.

But what we know is the opposite, workers flee countries with laws that protect them too much.

There are almost 200,000 Portuguese and Spanish people working in England, where it is very easy to hire and fire. Around 4 million Indonesians, one of the most expensive countries to fire, work in Malaysia, Australia, and also in Singapore, where there is not even a general minimum wage law.

I present to you two groups of countries

1. The United States, Canada, Australia, Singapore, Hong Kong, Maldives, Marshall Islands.

2. Bolivia, Venezuela, Equatorial Guinea, Sao Tome and Principe, Tanzania, Congo and Central African Republic.

Those who believe in the magic of labor laws would say that they are stricter in the countries in the first group. After all, these are the countries where workers live with the best quality of life in the world. 

In fact, group 1 includes the seven countries that, according to the World Bank, have the laws that least harm employers. Group 2 includes the seven countries that most protect workers.

Note that according to the Economic Freedom Index, the three countries with the lowest levels of state intervention in labor relations are the United States, Singapore and Hong Kong, all developed countries with a very high HDI.

Now look at the countries that appear among the 10 with the greatest state intervention in employment relations: North Korea, Somalia, Venezuela, Cuba and Sierra Leone.

Which of these places would you rather live in?

Therefore, it is clear that labor laws should not be confused with workers' rights, that is, with the effective enjoyment of goods, services and quality of life.

But thinking about it, if it’s not labor laws that guarantee better conditions for employees, what else could it be?

2) Workers' rights are ensured by a thriving economy and high productivity

What really matters for the material well-being of workers is economic development. Specifically for improving the quality of life of employees, two things are essential: productivity and entrepreneurship.

The productivity of an economy is the amount of goods and services that the economy is able to produce. This can also be measured on average for each worker per hour of work.

This variable, worker productivity, is extremely important because it, in a way, sets the salary ceiling. In fact, to earn a thousand, I need to produce at least a thousand and one. 

It turns out that the higher the qualifications of a professional, the greater his or her access to higher quality capital goods - machinery, tools, computers. The higher the level of specialization in the economy, that is, the less time wasted on unproductive bureaucracy.

The higher your productivity per hour, the higher the employer will be able to pay you a higher salary without incurring losses, which in the long run would result in the company becoming unsustainable and all employees being laid off.

On the other hand, so that the increase in productivity is not completely absorbed by the employer's profits, there must be competition between businesspeople in the sector.

This means I have to compete for labor by passing increased revenue on to wages or reducing prices to attract consumers.

This last effect ends up increasing employees' real wages, as it increases their purchasing power when they are on the other side of the counter.

This competition between entrepreneurs is stimulated by the reduction of bureaucracy and costs to start and maintain a business, as well as by expectations of higher earnings.

There are many ways to promote increased productivity

I would like an hour of work in Brazil to produce more value, because that is the only way to make people earn more. There are many ways to promote increased productivity.

This involves, for example, the opening agenda, since competition is very important for companies to organize themselves in a more productive way. Being more productive, the company can pay better and make better profits.

The only way to make the consumer, the worker and the businessman happy at the same time is to produce more per hour of work, I can sell cheaper, pay better and make more profit. Yes, there is such a miracle, and it is called productivity.

Many people in Brazil do not realize that wages are higher in other countries because productivity is higher. An American worker, for example, produces four times more than a Brazilian worker, because of the factors mentioned above. Consequently, wages will be much higher there.

I tell you that the factors for increasing wages and per capita productivity and entrepreneurship depend on a favorable business environment. That is why the view that there is an inexorable competition between entrepreneurs and employees is incorrect.

On the contrary, countries with high profits also have high wages, because the good business environment generates investment from entrepreneurs, which in turn causes increased productivity and competition.

That is why I say that the best social policy is to increase productivity and stimulate entrepreneurship that meets the new Labor Laws and the approved Labor Reform.

At this point, you might agree with me. Economic growth is the best way to increase wages. But in parallel, why not maintain restrictive labor laws with employers?

3) They discourage hiring and, as a result, increase unemployment and informality

The amounts provided by law to workers represent costs for employers. As we have seen, the ceiling of the cost that an employer can bear is set by productivity.

Therefore, when I have more costs than productivity can support, that is, when a salary higher than the employee's production is legally imposed, there will only be two alternatives left for me as an entrepreneur: not to hire or to hire informally and not respect all these provisions.

A third temporary option would be if I hired at a loss, but in the long term this would lead to the closure of my company, with unemployment for everyone who worked there including me.

However, there are several studies that point to a correlation between restrictive labor laws and higher unemployment rates. For example, a study of 73 countries confirmed this and found that if Italy adopted legislation as liberal as that of the US, unemployment would fall by 2.3%.

This explains the high level of informality in Brazil, a country with low productivity and a backward and extremely restrictive CLT. The charges imposed by the CLT can represent 191% of the salary. I think this is absurd.

By counting the minimum wage or the category floor, we can see the minimum level of productivity that this imposes for a person to be formally employed.

Of course, we would like all employees in Brazil to receive much more than their minimum wage and all the responsibilities of the CLT. But this can only be done through increased productivity and entrepreneurship.

If, before the economy reaches sufficient levels of per capita productivity, the law imposes wages and salaries, you will be condemning many people to informality or unemployment.

We noticed an aggravating factor in this, precisely those people with lower qualification levels. These are professionals with lower per capita productivity standards, who are the most punished, along with younger people.

Indeed, legally guaranteed funds impose costs and increase the minimum productivity of workers in order to be formally hired. People with fewer qualifications and young people due to their lack of experience generally have lower productivity. Therefore, they are rejected by the formal labor market in countries with restrictive labor laws.

In Brazil, the poorest regions have higher rates of informality and young people suffer from unemployment levels, which are also much higher than the average population. In 2017, while the unemployment rate was 11.8% for the population as a whole, it was 39% for young people between 14 and 17 years old and 25% for young people between 18 and 24 years old.

Meanwhile, among the poorest classes, more than 60% worked informally, and another little over 23% were unemployed. In other words, more than 80% of the poor population does not receive any benefit from the impositions provided for in the CLT. On the contrary, it is precisely because of the CLT that a good portion of them are unemployed or working informally.

This effect is also explained by the above reasons, the wealthier classes tend to be more qualified and therefore more productive. Therefore, they find it easier to enter the job market.

4) They discourage investment and impose barriers to small entrepreneurship

Labor laws also have another negative effect on workers: they impose barriers to entrepreneurship, which is the driving force behind job creation.

First, labor regulations and bureaucracy create the risk of legal disputes. According to several studies, the risk of legal disputes reduces investment. In fact, the costs of dismissal and the high risk of legal disputes act as a possible future expense for which the entrepreneur has to set aside a sufficient amount of money.

With this, there is a tendency to save part of the capital that could be used to expand the business, generating employment and income, to support possible future legal expenses.

Research shows that the higher the dismissal costs and the risk of legal disputes, the higher the average provisioning of entrepreneurs and, consequently, the greater the impacts on investment.

As a businessman, I create fewer jobs for everyone. I always think about the cascading effect of reduced investment. Every business that is not established means less production, less GDP for the country, and fewer hires. Every employee that is not hired means someone who stops consuming, investing, saving, etc.

Second, all the red tape, including labor red tape, is particularly damaging to small businesses. Imagine if I wanted to start a small business. I would need at least one person to help me.

If the minimum wage is “X” and the CLT almost triples this cost, I need to have a minimum income of 3 times X plus maintenance costs, to buy raw materials, physical structure, etc. In order to set up my business, that is, to have zero profit. If I realize that I will not have a profit immediately, I will either hire informally or I will not open my business.

Some facts you may not know about the profile of the Brazilian entrepreneur

I also emphasize that Brazilian businesspeople, on average, do not correspond to the image of the rich bourgeoisie, touted by the extreme left in an attempt to validate their thesis of class struggle.

1st) 44% of them work out of necessity and this number is growing.

2nd) Almost half of entrepreneurs work around 10 hours a day.

3) More than 50% of entrepreneurs do not take vacations, and among those who do, only 3% enjoy 4 weeks of annual vacation.

4) According to a SEBRAE survey, 58% of entrepreneurs can be classified as low-income people.

5) Labor laws have a cost to be applied. And it is the worker who pays for it.

Brazilian labor laws must be inspected. This is done by public agencies, labor offices, labor prosecutors, labor courts, etc. These agencies have a budget and this inspection has a cost.

Let us take the example of the Labor Court. In 2017, it had a cost of R$17 billion. In 2018, this budget was increased to more than R$20 billion, and in 2019, to more than R$21 billion. In some years, the operational costs of the Labor Court are higher than the total paid to claimants in the same period.

The labor reform reduced legal proceedings and could generate savings on unnecessary expenses related to the public sector.

Now, this makes it clear that excessive labor bureaucracy is a burden for starting businesses. And this is a problem that only affects small investors. The giants in their respective sectors will not have any problems, they have working capital, they can retain labor consultants, lawyers, etc. But small businesses can suffer from excessively restrictive legislation, as is the case with the CLT.

Was the result of the Labor Laws and Labor Reform positive or negative? 

6) The results of the Labor Reform were extremely positive

When analyzing the labor market results in 2018, it is necessary to take into account that it was a year of low growth. Due to excessive public spending and the resulting fiscal crisis aggravated by the postponement of the Pension Reform, there was a strike in May with huge economic losses. And it was an election year, in which investments were delayed by the risk of setback with the return of the far left to power.

Even in this unfavorable context, here are the results of formal employment thanks to Labor Laws and the approved Labor Reform.

January: Brazil creates 77.8 thousand jobs and has the best January since 2012.

February: With 61 thousand new jobs in February, the country ends the two-month period in the black for the first time in four years.

March: March has the highest number of job openings in 5 years. The country opened 56 thousand formal jobs and registered the third consecutive month of growth in the number of jobs with signed employment contracts.

April: The country creates 115 thousand jobs in April, the best month in more than 3 years.

May and June: These were weak months due to the truck drivers' strike, but they still recorded the creation of more than 33 thousand formal jobs in May, and the final balance of just 661 jobs in June.

July: Brazil created 47 thousand formal jobs in July; this is the best result in the last six years.

August: The country generated 110 THOUSAND jobs in August.

September: September has the highest formal job creation for the month since 2013.