Brazil’s Other Middle Class

Brazil’s middle class is now a plurality! Favelas are a thing of the past! Sports, sports and more sports are on their way! The BRICS are still together! The world’s carnaval was supposed to keep sambaing into perpetual glory.

Now for the reality check. Protests have erupted, and are some of the worst Brazil has witnessed in recent memory. City, state, and federal governments are seen to be repressing them, all while being caught entirely off guard by their size, and questioning the “information terrorism” role of the press in their genesis. And, worst of all, a creeping feeling that there’s something more to this than just a rise in subway fare.

But this isn’t the Brazil everyone has told us about, right? Wrong. Certainly, programs to help Brazil’s poorest have alleviated severe poverty across the country for the past decade, and these economic gains led to a decline in the country’s famously high income inequality. At the same time, frothy financial markets (including private and public equity) and loosened capital controls have made the crème-de-la-crème of Brazilian society fabulously rich. Just stroll Fifth Avenue in New York or Ocean Drive in Miami Beach to see how broadly big Brazilian money has splashed.

But danger’s been lurking in plain sight for several years now, and the massive demonstrations reported over the past week are evidence that the country’s galinhas have come home to roost. Namely, instead of rising from the slums of Rio or the rough neighborhoods of São Paulo, these protests have surged from Brazil’s established working and middle classes. And, despite their relatively cushy position, it is they who have been the losers in this economic renaissance.

Fernando de Holanda Barbosa from the OECD put out an excellent study last year entitled “Income Inequality and Labor Market Dynamics in Brazil.” While the work encompasses other topics, one trend that Holanda Barbosa pulls out goes a long way in explaining the roots of these protests.

Although this is not an elegant chart, the trend is clear. Brazil’s historic middle has had to cede ground to allow extreme poverty to abate. Critics will argue that the education/poverty link is not entirely clear, but time and time again, but the trends bear out in this data alone that more education generally means better incomes. Any rational Brazil observer will say the same.

Employment by Educational Group, Average Wage, and counter factual Average Wage

Courtesy OECD

Percentage of Workforce by Years of Education (Blue 2002 / Red 2009)

Percentage of Workforce

Average wage in Reais By Years of Education (Blue 2002 / Red 2009)

Real Wage

Percentage of wage share, compared to total average (Blue 2002 / Red 2009)



But, the story doesn’t end there. Coupled with this historic shift is a gaping lack of the skilled labor necessary to fill Brazil’s growth in manufacturing, engineering and finance jobs. In a Manpower study from last year, more than 70% of Brazilian employers cited problems in sourcing local talent for the jobs they have on offer. 

It is exactly this historically large middle class (and upper-middle class) that should be filling these productive gaps, moving up the income chain while the poorest take their place in the middle class. Instead, it has generated competition between these classes, with dwindling opportunities for those in the middle and upper middle class and serious skills mismatches with the country’s economic needs. And these are the folks that have played by the rules, paying Brazil’s inordinately high taxes (the second highest in Latin America – only behind Argentina) only to receive poor public services, suffer high crime, keep waiting for investments in infrastructure, and tolerate mediocre public education.

Certainly, these more surface issues of the quality of government services are at the top of Brazilians minds when they go out to the streets. But deep down inside there’s a creeping resentment that Brazil’s economic model, lauded by many the world round, might not be as democratic as everyone thought it was.

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