UPDATED ASSESSMENT OF BRAZIL'S WAGE RATE GAP 1996-2011

Despite Brazil's plan for the recovery of the minimum real wage, the sustained increase in the cost of living is jeopardising the continuity of the growth of its wage rate equalisation index for all employed in the manufacturing sector vis-à-vis their counterparts in the U.S.

The biggest obstacle to resume the closing of the wage rate gap is the dramatic increase of the PPP cost of living. Indeed, in 1996 the PPP cost of living was $0,80 dollars or 80% the U.S. cost of living. Then, at the lowest point of Brazil's recession, the PPP had dropped to $0,38. However, the recovery from its recession has made Brazil extremely expensive, to the point that by 2011 Brazil has become more expensive than the U.S, with a PPP cost of living of $1,07 or 107% the U.S. cost of living. This is the first time ever that Brazil has had a higher purchasing power parity with the U.S. The higher the PPP, the higher the equalisation wage rate required. If the PPP is 107% the U.S. rate, then the nominal Brazilian wage rate required in U.S. dollars, to be fully equalised with the U.S. wage rate, must be 107% the U.S. wage rate. The factor directly affecting the PPP is the NCPI or consumer price index (inflation rate). If inflation is higher than in the U.S., the PPP will grow and viceversa. The Real has also revalued dramatically (75%) since 2004; yet exchange rates have no direct bearing on equalisation. The PPP is the rate of currencyconversion that equalises the purchasing power of different currencies. Thus, it acts as an estimated effective exchange rate used to reflect the real cost of living in a given country. policy, of wage depredation, is being pursued globally and with special emphasis in the European Union.
In order for Brazil to resume not only the recovery of its 1996 equalisation index for all employed in manufacturing but to also surpass it and, over time, gradually and completely close its wage rate gap with U.S. equivalent workers, it must put inflation in check (below 5%) and continue to increase nominal wages above inflation rates. Concurrently, Brazil must recover its momentum and resume high economic growth rates of 4 to 5% annual GDP. Between 2004 and 2012 Brazil averaged a 3,9% GDP, but in the last two years it has not even averaged a 2% growth, albeit the forecast for 2012 is of 3,5%.

Nonetheless, the odds for living-wage equalisation actually look better than they may appear to be. The future of Brazil's wage policy is being redefined with its legally-binding plan to raise the real minimum wage annually –a plan that began to be executed in 2010 and it is scheduled to continue until 2023– by following the simple formula of increasing the wage rate by adding to the inflation rate of the previous year the rate of GDP growth for the year two years prior. This plan is described in this assessment and it is applied as a projection for the closing of the wage rate gap for all employed in manufacturing in the span of thirty years, based on Brazil's minimum wage appreciation policy.

**********Download the pdf file with the analysis of Brazil's wage ratge gap here.**********