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An unidentified worker handles the hook of a crane during the construction of the Luis Eduardo Magalhaes hydro-electric plant, in the city of Lajeado, in the northern state of Tocantins, Brazil Friday June 1, 2001. (Dado Galdieri/AP/Dado Galdieri/AP)
An unidentified worker handles the hook of a crane during the construction of the Luis Eduardo Magalhaes hydro-electric plant, in the city of Lajeado, in the northern state of Tocantins, Brazil Friday June 1, 2001. (Dado Galdieri/AP/Dado Galdieri/AP)

Brazil's economy struggles to find balance Add to ...

Patrick Muller sits alone in his store, Mademoiselle Brasil in Sao Paulo, surrounded by French frocks, jewelry and his laptop.

Whatever happens - a customer needs help, a package delivery arrives, e-mails or phone calls - he has to handle it alone. For four months, he's looked for an assistant, for eight months, sales people.

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Nothing.

"I'm not finding anyone. It's crazy," he said. "The salary they're asking for isn't a good wage for me."

Mr. Muller's worries are a staple among small- and medium-sized businesses in Brazil. Record low unemployment, competition for labour from a booming construction industry and inflation at a six-year high have put the squeeze on these businesses.

Companies scraping the bottom of the employment barrel are finding themselves teaching employees the basics of grammar and arithmetic. Coffee farmers in Minas Gerais are busing in workers to try to get through the harvest.

Unions have threatened strikes to get bigger raises, and "help wanted" signs dot shop windows in neighborhoods throughout Sao Paulo - sometimes several signs in the same window.

And even as Latin America's biggest economy slows after a 7.5 per cent jump last year, economists and employers alike are afraid there's little relief in sight.

With businesses raising wages to lure workers, the results will likely mean higher prices for everyone as those employees take their fatter wallets out shopping. Higher demand for goods and services could lead to price hikes and boost inflation.

That, in turn, will likely mean higher interest rates. Yet with a benchmark lending rate already at 12.25 per cent, the central bank is reluctant to hike much further.

Other countries in the region have felt similar worries, including Chile, where the central bank has tightened interest rates by 2 percentage points to 5.25 per cent this year alone.

CONSTRUCTION BOOM A PROBLEM

In a country that's long struggled with poverty, the gains in salary bring benefits: Millions of people have joined the middle class, now able to give their children better educations and to provide more for their own futures.

But the labour market woes go back decades. For one, Brazil's economy is now growing at rates that, while slower than last year's boom, still make it the envy of many a developed nation - an expected 4 per cent this year.

In contrast, the U.S. economy, the world's biggest, is only expected to grow 2.5 per cent.

Brazil's hot economy drove unemployment to a record low of 5.3 per cent in December. It has since risen to 6.4 per cent in May - still near a record low - although some economists say the rise could be caused by seasonal factors.

Unemployment is close to half the rate of 11.2 per cent when former President Luiz Inacio Lula da Silva took office in January 2003.

Another culprit comes from lack of infrastructure. As Brazil catches up on everything from roads to housing and prepares for the 2014 World Cup and 2016 Olympics, the construction industry is at the top of the labour heap.

Low as Brazilian unemployment is, the construction sector rate is even smaller: just 3.5 per cent in May.

Construction projects from highways to soccer stadiums soak up labourers without college degrees or much experience, the kind of worker who could have clerked for Mr. Muller, for example.

The construction industry, in fact, has cannibalized its own to an extent. Large builders who can offer higher wages and better benefits have taken employees from smaller outfits, who find themselves struggling with the same labour problems that small businesses in other sectors are facing.

INFLATION ON TAP

In a survey by Brazil's National Confederation of Industry (CNI), 89 per cent of construction companies said finding qualified workers is a problem. And 61 per cent of those said the lack of workers hurt efficiency.

"Companies wind up hiring unqualified people, who can't work at the same pace as people with qualifications," said Renato da Fonseca, head of research for the CNI.

"You wind up (hiring) but with a loss in efficiency," he added, noting that some builders are struggling to meet deadlines as a result.

"These days, the labour market is out of long-term equilibrium," said Mauricio Rosal, chief Brazil economist for Raymond James. "It's clearer and clearer what's happening on the side of prices."

Inflation data bear that out: In the 12 months through June, the benchmark IPCA consumer price index rose 6.71 per cent. That's well above the central bank target range of 4.5 per cent, plus or minus 2 percentage points.

And analysts say the rate will go higher yet because monthly inflation at this time last year was slower.

The central bank has raised interest rates four times so far this year - bringing the benchmark rate up to 12.25 per cent from 10.75 per cent at the end of last year - and will likely hike again this week.

The labour market, in fact, is now a worry for the central bank, which has highlighted salary gains in the minutes of several of its most recent policy meetings.

Near the border of the states of Minas Gerais and Sao Paulo, Gabriel de Carvalho Dias had an extra 20 to 30 people helping pick coffee on the family farm at this time last year.

"Right now, I don't have anyone," he said.

Despite higher wages this year, finding people has become so tough that some of his neighbors have resorted to bringing in workers by the busload from nearby cities.

Those same workers then often jump to other farms in pursuit of higher wages, Mr. Dias said.

If it weren't for coffee prices roughly doubling in the past year, Mr. Dias added, "I practically wouldn't be harvesting."

Instead, the problem comes back to labour - and the effects on the rest of the economy.

"The people who make that money, they go to the city and spend it all," he said. "They spend it easily. It keeps up commerce, but the other side of that is inflation."

 

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