VZCZCXRO4287
RR RUEHRG
DE RUEHSO #0371/01 0961018
ZNR UUUUU ZZH
R 061018Z APR 06
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 4823
INFO RUEHBR/AMEMBASSY BRASILIA 5967
RUEHBU/AMEMBASSY BUENOS AIRES 2146
RUEHAC/AMEMBASSY ASUNCION 2492
RUEHMN/AMEMBASSY MONTEVIDEO 1903
RUEHLP/AMEMBASSY LA PAZ 2697
RUEHSG/AMEMBASSY SANTIAGO 1645
RUEHRI/AMCONSUL RIO DE JANEIRO 6977
RUEHRG/AMCONSUL RECIFE 2829
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2357
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000371 
 
SIPDIS 
 
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 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONESE, NRIVERA, CMERVENNE 
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 
 
SAO PAULO 00000371  002 OF 002 
 
 
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