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Brazil’s real minimum wage has risen 188 percent since the start of the Plano Real stabilisation programme in 1994. Labour productivity over the same period has risen roughly 30 percent. That six-to-one ratio, laid out by BTG Pactual researcher and FGV IBRE economist Samuel Pessôa in Folha Mercado, is the single number that explains why Latin America’s largest economy is stuck with a 15 percent policy rate, debt approaching 95 percent of GDP, and no obvious path to lower either.
The Disconnect in Full
Pessôa’s longer dataset reinforces the point. In 1951 values, Brazil’s minimum wage reached R$378 by 2024 — a 297 percent cumulative increase. Labour productivity over the same timeframe advanced 204 percent, incorporating revised estimates from economists Bacha, Tombolo and Versiani. The United States managed 355 percent productivity growth over the same period. Brazil has been paying itself more while producing comparatively less — and the gap has widened sharply since the early 2000s, when successive governments embedded above-inflation wage indexation into law.
A reader challenged Pessôa by noting the minimum wage had fallen roughly 50 percent from its 1950s–60s peaks under Vargas and Goulart to its Plano Real starting point. Pessôa acknowledged the decline but argued those earlier wage levels proved unsustainable, producing chronic inflation and continuous real wage erosion. The post-1994 valorisation policy has been more durable — but durability and sustainability are not the same thing.
R$210 Billion and Counting
The 2026 minimum wage rose to R$1,621 on January 1 — a 6.79 percent adjustment calculated from INPC inflation plus GDP growth, capped at 2.5 percent real gain under the fiscal framework rules introduced in late 2024. That single number ripples across 59.9 million Brazilians: formal workers, INSS retirees, BPC beneficiaries, unemployment insurance recipients. Every real added to the minimum wage mechanically increases federal spending on indexed social programmes.
The cumulative effect under Lula’s third term is an estimated R$210 billion in additional primary spending for 2026, driven by minimum wage valorisation combined with the re-indexing of health and education expenditure to revenue collection. Public debt is projected to rise by 10 percentage points of GDP over the course of this administration — from 87.3 percent in 2024 to roughly 95 percent in 2026, according to Deloitte’s latest country outlook. For an emerging market economy, that is exceptional; Chile and Peru carry debt ratios less than half of Brazil’s.
The Selic Trap
The Banco Central held the Selic at 15 percent for the fifth consecutive meeting in January, with inflation expectations sitting at 4.0 percent for 2026 and 3.8 percent for 2027 — both above the 3 percent target. Wage growth remains strong. Fiscal policy remains loose. Both factors keep the central bank pinned.
The problem is structural, not cyclical. Nearly half of Brazil’s domestic debt — 48.3 percent — is indexed directly to the Selic. Every basis point of tightening mechanically increases the government’s debt servicing costs, which already run at roughly R$982 billion annually, or 7.8 percent of GDP. The government is simultaneously trying to achieve a primary surplus of 0.25 percent of GDP in 2026 while entering an election year — a combination that markets view with justified scepticism, given that the first three quarters of 2025 produced a primary deficit exceeding 1 percent of GDP. Congress already voted down a proposed financial transactions tax last year, and Brazil’s tax-to-GDP ratio is already the highest in Latin America.
The Prescription Nobody Wants
Pessôa’s argument is mechanically simple: achieving macroeconomic equilibrium with lower interest rates and stable debt requires freezing the real minimum wage at its current level — no further increases — for many years. Health and education spending would need to be indexed to demographic growth rather than revenue collection, severing the link that automatically inflates expenditure when the economy expands.
That prescription collides head-on with the political economy of Brazilian democracy. The valorisation policy is popular, its beneficiaries are numerous, and Lula’s coalition was built on precisely the kind of redistribution it enables. The 2026 election will be fought partly on this terrain — whether Brazil can sustain a social democratic welfare state on the productive base of an economy where sovereign debt is growing faster than output.
For now the answer is simple: it can, as long as someone is willing to pay 15 percent for the privilege of lending to it.
Sources: Deloitte, Agência Brasil, IMF
