PROSPECTS FOR LABOR REFORM AFTER BRAZILIAN ELECTIONS

UNCLAS SECTION 01 OF 02 SAO PAULO 000371

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SIPDIS

STATE FOR WHA/BSC AND DRL/IL
STATE PASS USTR FOR SULLIVAN/LEZNY
NSC FOR CRONIN
TREASURY FOR OASIA, DAS LEE AND FPARODI
USDOC FOR 4332/ITA/MAC/WH/OLAC/SHUPKA
USDOC ALSO FOR 3134/USFCS/OIO/EOLSON/DDEVITO/DANDERSON
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DOL FOR ILAB MMITTELHAUSER

E.O. 12958: N/A
TAGS: ELAB PGOV SOCI ECON BR
SUBJECT: PROSPECTS FOR LABOR REFORM AFTER BRAZILIAN ELECTIONS

REF: SAO PAULO 280


1. Summary: Labor expert Jose Pastore told Poloff he has advised
opposition presidential candidate Geraldo Alckmin not to pursue
comprehensive labor reform immediately upon taking office, should he
win, but to begin with more modest and less controversial
legislative proposals that would remove disincentives to hiring and
bring more workers out of the informal sector. End Summary.


2. Jose Pastore, a retired professor who advises Sao Paulo Governor
(and opposition presidential candidate) Geraldo Alckmin on
labor-related issues, met March 23 with Poloff and Pol and Econ
Assistants. Pastore indicated that labor reform would be a
difficult issue to campaign on, since although it is popular in the
business community, it is likely to alienate many voters who
associate it with taking rights away from workers. Poloff noted
that Alckmin's advisors had indicated that, if elected, he would
pursue labor reform in his first month in office. Pastore confirmed
this, but noted that due to the complexity of the task, it would
have to be undertaken in stages.


3. Pastore began by reiterating that labor reform ("reforma
trabalhista") and industrial relations reform ("reforma sindical" -
see reftel) are two sides of the same coin and should be pursued in
tandem. Since both reforms would require amending the Constitution,
they would need a three-fifths vote in both houses of Congress, in
two separate votes, to pass them. This is a daunting task for any
president, especially since both reforms would challenge entrenched
interests.


4. Accordingly, Pastore recommends that "President Alckmin" begin
with a more modest reform which would appeal to legislators and
bring some workers immediate tangible benefits. He proposes, for
example, changes in the legislation governing the Length of Service
Guaranty Fund (Fundo de Garantia por Tempo de Servigo - FGTS). This
is a sort of unemployment insurance program funded by payroll taxes.
One peculiarity of Brazilian labor law is that many of the rules are
identical for all companies regardless of size. All employers are
required to contribute 8 percent of their payroll every month to
FGTS. When a company lays off a worker or fires an employee without
cause, it must pay the employee 40 percent of the funds accumulated
in his/her FGTS. Thus, it is extremely expensive to dismiss
workers, especially long-term employees, with the result that many
companies - especially small businesses - are reluctant to hire new
employees, at least on the books. Instead, if they need personnel,
they simply hire informally. Workers so employed have no benefits
or protection.


5. Pastore recommends that the percentage of the employer's
contribution to FGTS, and the percentage of the fund paid to the
employee upon termination, be made negotiable between employers and
employees, at least for small and medium-sized enterprises (SMEs).
The rigid 8 percent and 40 percent figures across the board, he
thinks, create too much of a disincentive to hiring and are driving
more employment into the informal sector. Flexibility should have
the reverse effect. He said he proposed the idea to officials of
President Lula's Workers' Party (Partido dos Trabalhadores - PT)
when Lula came into office, but they dismissed it, fearing that
flexible contributions would create "second-class employees" who
received reduced severance pay. It didn't seem to bother them, he
commented wryly, that workers in the informal sector, who receive no
severance pay, are more like "fifth class employees." If these
workers could be formally hired, made legal, and given a "carteira"
(the official document carried by all legal workers containing all
information pertaining to their status),they could qualify for the
generous benefits of Brazil's social security system, thus
measurably improving their standard of living.


6. Comment: Professor Pastore's modest proposal appears to be a
reasonable first step towards changing the rules of the game for
employees of SMEs. Reforming Brazil's antiquated, rigid labor system

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and reducing labor costs overall will be much more difficult: as
Pastore said, it will require more than mere political capital and
political will. It will require packaging reforms in a way to
alleviate legislators' fears that by supporting labor reform they
would be alienating workers and signing their political obituaries.
End Comment.


7. This cable was coordinated/cleared with Embassy Brasilia.

MCMULLEN