March 2008 · Number 122 A regular series of notes highlighting recent lessons emerging from the operational and analytical program of the World Bank`s Latin America and Caribbean Region. Jobs for Brazil's Poor 44692 Social Protection Programs and Labor Supply Impacts on the Poor in Brazil David Robalino, Bénédicte de la Brière and Kathy Lindert The World Bank is carrying out a program Figure 1 - Analytical Framework for the Labor AAA of analytic and advisory activities ("the La- Labor Supply and Social Protection bor AAA") focused on the interface between Policies: Two Sides of the Coin social protection programs and labor sup- ply and productivity. This focus relates to PILLAR 1: PILLAR 2: the debates in Brazil surrounding the issue of helping transfer beneficiaries "gradu- Labor Incentives Labor Supply Impacts Labor Support of Public Transfers Services ate" from poverty and from dependence on transfer incomes. The AAA is structured - BPC-elderly - BPC-disabled Poor Non- Poor - Job Training - AJA/EJA along two "pillars." Pillar I addresses - Bolsa Familia - Pensions - Placement services questions related to the impacts of explicit - Unemplyment Insurance (UI) Linkages? and implicit public transfers on labor sup- · Linking transfer beneficiaries ply and savings decisions. In particular, to labor support services · Conditionalities? · Workfare? what is the effect of public transfers such as Bolsa Família and those related to the Results undeR Phase I: layIng the gRound woRk social insurance system (pensions and unemployment) on work incentives, early entry and retirement, sector The first phase of the Labor AAA (July 2006-June choice, and ultimately, public expenditures, human 2007) focussed on carrying out a comprehensive pro- capital accumulation and growth. Pillar II focuses gram of consultations, reviewing the policy and ana- on program design and evaluation. The end goal is lytical work conducted to date in the areas of interest, to identify how the portfolio of transfer and active building partnerships with various research centers labor market programs can be optimized to enhance and preparing the ground for new analytical work. the "employability" of the poor, help promote their Some of the main outputs and insights from the first graduation from poverty, and, ultimately, from depen- phase are summarized below. dence on transfer income. In addition, the Labor AAA includes a component to assess public perceptions PIllaR 1: explicit and implicit transfers and labor supply about Social Protection programs. The Labor AAA is Brazil channels around 12.2% of GDP in public a "living program" that seeks to respond to questions transfers through the social protection system. posed by Brazilian policy-makers as they strengthen These transfers can be explicit, as in the case of the education-social protection­labor market nexus conditional cash transfers or social pensions, or im- (see Figure 1). This approach is helping convene the plicit, when contributory social insurance programs different stakeholders at the federal level by bringing pay rates of return on contributions above market evidence and policy analysis to the debates. levels. There is broad agreement that these transfers have Unemployment insurance (UI) programs. In OECD played an important role in helping individuals to miti- countries there is compelling evidence showing that, by gate the impact of risks such as unemployment, infla- increasing reservations wages and reducing job search tion, disease, longevity, and disability, while reducing effort, UI increases the length of unemployment spells. poverty rates. Previous analytical work in Brazil and The higher the benefit replacement rate and the eligibil- elsewhere suggest, however, that these transfers can ity period, the longer the spell (e.g., a 10% increase in also have unintended consequences. First, their in- replacement rate tends to increase unemployment length come effect can reduce labor supply (participation rates by 6%). At the same time there is weak evidence that and retirement ages, hours worked, job search efforts) UI allows workers to find better/higher paid jobs. For and savings. Second, the necessary financing arrange- Brazil, again, the literature is very thin. There are actu- ments increase the tax-wedge, reduce net earnings, ally no studies that examine the impact of seguro desem- and can in turn lower employment levels and provide prego on the length of unemployment and labor supply. incentives for informal versus formal sector work. There is evidence, however, that the FGTS benefit (and The transfers can not only affect the behavior of direct the 40 percent fine that employers have to add to the recipients, but also those of other adults living in the benefit when firing a worker) have significant impact on household. Understanding these behavior-response as- job turnover, especially when the economy is growing pects is thus important for better program design and to and there is growing demand for labor. More analysis is avoid situations where the programs create dependency required in this area. and/or "poverty traps" Social assistance. A large body of literature in OECD A comprehensive review of the economic literature countries, and especially in the US and UK, indicates that: conducted under Phase I suggests that the distortions (a) design innovations in social assistance programs in arising from social insurance programs are far more OECD countries (such as the elimination of the implicit important than those related to the social assistance 100% marginal tax rate in older social assistance transfer transfer programs. In general, there is room to im- programs and the introduction of time limits and work re- prove incentives but more analytical work is necessary quirements) seem to have resulted in a substantial drop in to identify the necessary policy interventions. The caseloads and an equivalent increase in labor market par- main insights can be summarized as follows. ticipation by beneficiaries; and (b) earned income tax credit programs seem to have been very successful in reducing Pensions. There is strong evidence from the literature poverty among the working poor, without creating signifi- for OECD Countries that the generosity of the manda- cant work disincentives. For developing countries, on the tory pension systems (i.e., deviations from actuarial other hand, the evidence does not support the hypothesis of fairness) has contributed to reduce retirement ages and work disincentives of social assistance programs. For in- participation rates among older workers. It has been stance, conditional cash transfer programs in Latin America estimated that the cost of early retirement resulting from have not had a substantial impact on the labor supply of foregone revenue and higher pension expenditures is in adults, and have been successful in delaying the entry of the order of 7.5 percent of GDP. For Brazil, while the children and the young into the labor force, helping them literature is still thin, there is evidence that the Length accumulate more human capital. For Brazil, the evidence is of Service Component (LOS) not only has incentives similar. The most robust evidence indicates that the Bolsa for very early retirement, but is also likely to be induc- Família Program has no statistically significant impact on ing premature entry into the labor force and low human adult labor supply, while at the same time it has induced capital accumulation. There is also evidence that the children to accumulate human capital by staying in school. rural pension and non-contributory old age pensions reduce labor force participation among working adults. PIllaR 2: active labor support services Nonetheless, these programs might be also contributing Debates about the "graduation agenda" for beneficiaries to delayed entry into the labor force among the young, of transfer programs have increased in prominence in which can increase human capital accumulation. In gen- recent years, both internationally and in Brazil. Indeed, eral, there is room to improve the design of the pension an emerging trend with cash transfer assistance ­ both system to reduce unnecessary economic distortions. in LAC and in OECD countries ­ is to enhance programs in ways that promote "graduation" and avoid dependence 2 · March 2008 · Number 122 on welfare. In Brazil, much of this debate has focused on Bolsa) as the gateway to various programs (such as for the "jobs agenda" and improving the "employability" of Brasil Alfabetizado), but many labor services (such as the poor. Thus, federal, state and municipal governments the Sistema S) have no such links. and other actors have promoted a range of labor support services, both public and private, designed to support produc- Inter-institutional coordination is crucial but faces many tivity and earnings. These can be roughly divided into five challenges. Linking poor beneficiaries of transfers (such categories: (a) support to "human capital" and qualifications as the BFP) to active labor support services inherently re- of the worker (various types of training services); (b) support quires inter-institutional coordination. Some examples of to "job placement" (job search services, job placement, etc.); recent efforts include: work with MDS to make an inven- (c) support to urban self-employment (micro credit, formaliza- tory of labor support programs ­ though this was limited tion of micro enterprises, technical assistance); (d) support to to federal programs. Some efforts are also being made to rural self-employment (micro credit, technical assistance for increase coordination between MDS and other agencies, for family agriculture, market access, etc.); and (e) linking benefi- example: (a) between MDS and the Ministry of Education ciaries to other complementary services. Not all of these are (MEC) for the prioritizing of beneficiaries of Brasil Alfa- designed to reach the poor or transfer beneficiaries. Nonethe- betizado; and (b) between MDS and the Ministries of Labor less, governments at all levels are looking at ways in which and Agricultural Development and the S System in setting they could adapt these services to better reach the poor (and up "affirmative action targets" to promote inclusion of the link transfer beneficiaries to these services). poor (and BFP beneficiaries) in their programs. At the local and inter-governmental level, the cooperation agree- The main insights from policy discussions and preliminary ments signed between MDS and the municipalities also analytical work under Phase 1 can be summarized as follows: signal an agreement to prioritize BFP beneficiaries for other complementary services offered by municipalities. In prac- There are important challenges to improve the employ- tice, however, there are many challenges to promoting inter- ability of beneficiaries. The beneficiaries of cash transfers institutional coordination, including: (a) policy decisions to have low "employability" characteristics: low education, prioritize poor transfer beneficiaries for these services; (b) low basic skills. They also primarily work in informal sala- funding and jurisdictional responsibilities; and (c) the lack ried jobs or are self-employed. For them to obtain good jobs of (and need for) inter-institutional information systems to and/or sustainable self-employment, they would need invest- monitor and evaluate the effectiveness of such links. ments in human capital (to acquire better skills) and also complementary support that addresses the non-work related Several programs are not designed to reach the poor. barriers they face (IDs, property titles, childcare). Professional training offered by the "S system" for ex- ample, is mainly geared at employees who are already in There is a need to define a policy framework to optimize jobs and who have at least basic education skills ­ and the portfolio of programs. The different ministries and it has no formal mandate to attain the poor. Most of the levels of government operate numerous programs, includ- micro-credit schemes require some minimal level of lit- ing: (a) for human capital support: Brasil Alfabetizado, eracy and experience with an already existing business. youth-adult education (EJA/AJA); (b) decentralized The only attempt to reach the poorest is via the Banco do programs to support job placement (such as the National Nordeste pilot village banking scheme. Employment System, SINE); (c) support to self-employ- ment, particularly in rural areas (such as PRONAF credit There is no systematic approach to monitor and evalu- schemes and MDA/MTE technical assistance programs); ate programs. Few active labor support programs have and (d) some efforts to link beneficiaries to complemen- been evaluated for impacts. Even with the big push tary services (such as partnerships between MDS and on literacy via Lula's Brasil Alfabetizado and the Justice to provide IDs to beneficiaries, and local interven- youth/adult education programs (EJA/AJA), there is tions by the Centros de Referência da Assistência Social). little conclusive evidence on learning outcomes and However, there is no systemic approach to this array of income-generation impacts (despite efforts by IPEA to efforts, and little information or understanding on the track participants over time). Similarly, there is little potential gaps, overlaps in coverage and the need for in- evidence of impact of the programs to support self-em- ter-governmental and inter-agency coordination. MDS ployment (in urban and rural areas), though there is some is promoting the use of the Cadastro Único (registry for information about low survival rates of businesses sup- March 2008 · Number 122 · ported by PROGER programs ("Programas de Geração demographic structures and life expectancy by age. The de Emprego, e Renda," which are special lines of credit main goal of the second phase of the Labor AAA is thus to sectors with little or no access to the conventional fi- to deepen the analysis of program impacts in the case of nancial system, such as SMEs and cooperatives, financed Brazil and contribute to the formulation of policies that through the "FAT"). Finally, other than participant can improve their allocative and technical afficiency. feedback on courses, there is no evaluation of the impact of S System training courses, since the objectives and Pillar 1. The objectives of the second phase currently un- mandate of the S System are to provide courses, with no der implementation are two fold. First, to better measure targets for improved productivity or job placement. This the absolute and relative impact that pensions, unemploy- is all the more surprising since public spending on these ment insurance, and Bolsa Familia are having on: labor activities amounts to over US$4 billion in the S System force participation (entry and retirement), jobs search alone and another US$2 billion in the other federal pro- intensity, hours worked, sector choice, and ultimately the grams, two-thirds of BFP annual budget. cost of the programs, human capital accumulation and growth. Second, to identify a set of integrated policies PublIc PeRcePtIons that can improve benefits adequacy for the various pro- An analysis using a media database developed by mem- grams, security, and financial sustainability, while mini- bers of the Labor AAA shows that conditional cash mizing labor market distortions. The analysis is based on transfers (such as the Bolsa Família Program) are highly quantitative tools that are being developed and implement- visible in the press. While press coverage is fairly fa- ed in collaboration with the University of Sao Paolo, the vorable overall, elections do bring increased scrutiny and Ministry of Labor, and the Brazilian Previdencia. criticisms (political cycle) regardless of program or ad- ministration (similar for the predecessor CCT programs Pillar 2. Several activities are under way to try to fill as for Bolsa Família). The press focuses on some techni- remaining knowledge gaps in a feasible and pragmatic cal aspects of the program: registration, oversight and way. They include: (i) a review of Lessons of Inter- controls, conditionalities and monitoring. These aspects national Experience with labor support programs, with have evolved over time as the program matures with a emphasis in the understanding of inter-institutional ar- lot of discussion on registration (a first-generation issue) rangements to promote welfare-to-work by linking trans- early on and more focus on conditionalities and gradua- fer beneficiaries to other programs; (ii) an International tion/sustainable poverty alleviation (a second-generation Workshop/Discussion Series on Skills for a Productive issue) as the program matures. Life (took place in December 2007), Connecting the Poor to Jobs and Income-Generation Opportunities, and Targeting and registration generate favorable coverage Generating Economic Opportunities for the Poor; (iii) when targeting is accurate. The press puts more emphasis the definition of indicators to measure employability on inclusion errors while it pays less attention to exclusion and the preparation of survey modules to gather the data errors. Conditionalities are the second key issue: their ex- necessary for their estimation; (iv) technical assistance istence and monitoring boosts credibility of transfers and for an impact evaluation of the new "Bolsa Trabalho" help decrease perception of assistencialist hand-outs. (workfare) program being piloted in the State of Pará (support for the actual data collection is pending fund- Phase 2: building evidence to Inform Policy and Reforms ing); and (v) ex-ante impact evaluation of the recent changes to the BFP which involve an extension of the As previously discussed, most of the empirical and program conditionalities until 18 years of age or the policy research looking at the labor market impacts of completion of the basic cycle of schooling. public transfers and the effectives of active labor market programs applies to OECD countries. Impacts there, however, can be very different from those that would be about the authors observed in middle income countries like Brazil, due to David Robalino is a Senior Economist with the Social Protection Team the stringency of credit constraints, the relative importance of the Human Development (HD) Department, Bénédicte de la Brière of non-market activities, the labor intensity in production, is a Senior Economist in the Latin America and Caribbean Region HD the size of the informal sector, as well as differences in Department, and Kathy Lindert is the Bank's HD Sector Leader in Brazil. "en breve" is produced by the Knowledge and Learning Team of the Operations Services Department of the Latin America and the Caribbean Region of the World Bank - http://www.worldbank.org/lac · March 2008 · Number 122