State Ownership in Brazil: Balancing Economic Stability and Market Growth

State-owned enterprises (BOS) in Brazil play a crucial role in job creation, wage stability, and innovation but also reduce market competition and hinder business dynamism. While privatization lowers wages and restructures employment, BOS remain key economic players, requiring balanced policies to maximize benefits while minimizing distortions.

The World Bank’s Finance, Competitiveness, and Innovation Global Department, in collaboration with researchers from the institution, including Sara Brolhato, Xavier Cirera, and Antonio Martins-Neto, has conducted an in-depth study on the role of state-owned enterprises (SOEs) and businesses with state participation in Brazil. The study, Businesses of the State in Brazil: The Impact on Employment and Business Dynamism, explores how these enterprises shape labor markets, wages, and business competitiveness. With state intervention becoming an increasingly debated topic—especially in the wake of the COVID-19 pandemic—this research sheds light on whether these firms foster economic stability and innovation or hinder competition and market efficiency. By leveraging a novel dataset that integrates firm-level employment and ownership data, the study presents a comprehensive analysis of BOS, focusing on their impact on wages, privatization, and business dynamism.

BOS: Giants of the Labor Market

The study reveals that businesses in the state of Brazil tend to be larger, older, and more innovative than private firms. These firms dominate industries with high fixed costs, such as infrastructure, extractive industries, and utilities, but they also maintain a presence in competitive sectors like banking and telecommunications. Within BOS, private firms with minority state participation—referred to as participated firms—stand out as the largest employers and most innovative entities. This suggests that government investments are concentrated in high-growth, high-productivity sectors rather than being distributed evenly across industries.

These firms also play a crucial role in job creation. BOS generally hires more workers than private firms, with employment levels significantly higher among firms with state participation. Their reliance on highly skilled technical workers further highlights their emphasis on innovation and advanced capabilities. While these characteristics position BOS as key economic players, their influence extends beyond internal employment dynamics and has profound implications for wage structures and market competition.

The Wage Premium: A Double-Edged Sword

One of the most notable findings of the study is the significant wage premium associated with BOS employment. On average, workers in BOS earn 15.6% to 18.5% more than those in private-sector firms. However, when controlling for individual worker characteristics such as education, experience, and job roles, this premium shrinks to 4.5%, indicating that much of the wage gap is due to workforce composition rather than inherent benefits of state ownership.

Interestingly, while participated firms show the highest overall wages, this advantage disappears when accounting for skill levels and occupational differences. This suggests that these firms attract highly skilled workers rather than offering disproportionately high wages. While BOS provide stability and competitive salaries, this wage-setting approach can create distortions in the labor market, making it harder for private firms to compete for top talent.

Privatization: A Reality Check for Wages

Privatization events serve as a natural experiment for evaluating BOS’s impact on workers. The study examines firms that transitioned from public to private ownership, revealing that employees in privatized firms experience an average wage decline of 10% within two years, which deepens to 14% within three years. The hardest-hit groups include older, long-tenured employees, who not only see wage reductions but also face higher risks of unemployment.

Despite these challenges, privatization does not lead to significant job losses. Instead, newly privatized firms tend to restructure their workforce, shifting toward private-sector wage-setting mechanisms while maintaining overall employment levels. These findings align with global trends, where privatization often results in wage corrections but does not necessarily lead to mass layoffs. The implications are clear—while privatization can reduce public-sector wage distortions, it also brings about challenges for workers who may struggle to adapt to new labor conditions.

The Ripple Effect on Business Dynamism

Beyond employment and wages, the presence of BOS also shapes broader market dynamics. The study finds that industries with higher BOS concentration tend to have lower rates of new firm entry and reduced business dynamism. Young firms struggle to establish themselves in sectors dominated by BOS, which often benefit from government backing and entrenched market positions.

At the same time, BOS presence correlates with higher job creation rates and lower firm exit rates, suggesting that while BOS may reduce competition, they also contribute to employment stability. However, the study raises concerns about the increasing market concentration associated with BOS, which can stifle innovation, limit competition, and slow economic renewal. The COVID-19 pandemic further amplified these effects, leading to a decline in new business formation and a concentration of economic activity in larger, more established firms.

Finding the Right Balance

The findings of the study paint a complex picture of BOS in Brazil. On one hand, these firms provide stability, create jobs, and sustain employment during economic downturns. On the other, their dominance in certain sectors reduces market competition, hinders entrepreneurship, and contributes to wage distortions. Policymakers face a challenging task—ensuring that BOS contribute positively to economic resilience while minimizing their negative impact on competition and market efficiency.

Strategic privatization policies, targeted state investments, and regulatory frameworks promoting fair competition are essential in balancing these factors. As Brazil continues to debate the role of state-owned enterprises, this research provides crucial empirical evidence to guide policy decisions. The challenge ahead lies in leveraging the strengths of BOS while mitigating their potential drawbacks, ensuring a dynamic, competitive, and inclusive economic environment.