New research from the Australia Institute’s Centre for Future Work reveals the consequences of freezing public service pay, both for public sector workers and for the broader economy.
Governments are devoting unprecedented resources to protecting Australians against the health and economic effects of the pandemic, but a contradictory push to adopt fiscal austerity measures is also becoming apparent. Leaders of governments at all levels – federal, state and local council – have already announced plans to freeze wages and cancel previously agreed pay raises for public servants.
This paper reviews the consequences of pay freezes for both the workers affected by them, and the broader economy. Its main findings include:
- Freezing pay for even short periods of time reduces the lifetime income and superannuation savings of public sector workers by tens of thousands of dollars, because it permanently reduces their lifetime wage trajectory.
- A 6-month pay freeze for a typical federal APS worker will reduce career earnings by an estimated $23,500, and superannuation accumulations by another $4000 or more. The longer 2-year freeze contemplated for Brisbane municipal workers would reduce career earnings by over $100,000, and superannuation accumulations by $17,500.
- Pay freezes in the public sector are known to spill over into weaker economy-wide wage growth through three key channels: a composition effect, a demonstration effect, and a macroeconomic effect.
- At least 35% of the purported ‘savings’ from freezing pay is offset by the loss of direct tax revenues that would have been collected as a result of higher income and spending by public servants. And considering other tax revenue losses from the resulting slowdown in broader wage growth, even more of those ‘savings’ are never realised.
- Misguided public sector wage restraint in the aftermath of the GFC short-circuited an initial recovery in private sector wage trends in 2010-11, and helped lock in a lasting deceleration of national wages after 2013. Since then Australia has experienced the slowest sustained wage growth in the entire post-war era.
- Australia’s macroeconomy now faces a serious risk of deflation as the COVID-19 recession takes hold. Nominal wage and price trends were already dangerously close to zero when the pandemic hit. There is far less of an inflationary cushion now than when the GFC hit in 2008-09, yet this downturn will be far deeper. In this context, it is vital that governments move forcefully to anchor nominal price levels and prevent deflation. Preserving normal wage determination patterns, and ensuring that nominal wages keep growing at a healthy pace, will be crucial to economic stabilisation and recovery.
- The motivation for public sector wage austerity seems more ideological than fiscal or economic: pay freezes are justified with appeals to ‘shared sacrifice,’ and a symbolic desire to look ‘tough’ on finances at a moment when governments, of all political stripes, are about to incur their largest deficits in history. But government policy should be driven by economic reality, not political optics. These arbitrary pay freezes are both unfair and economically counterproductive.