False Economies: The Unintended Consequences of NSW Public Sector Wage Restraint

by Troy Henderson and Jim Stanford

Budget-cutting political leaders regularly target the jobs and incomes of public sector workers as the first and most politically convenient target of their austerity measures. But their crusade to balance the books by downsizing headcounts, intensifying work, and freezing the pay of the workers who deliver essential public services can backfire. In this new report, Troy Henderson and Jim Stanford consider the unintended consequences of one prominent austerity measure: the cap on public sector wage increases that has been in place in New South Wales since 2011.

The report considers the fiscal and economic context for the pay freeze, disproving claims that public sector employment was “bloated” before the freeze was imposed.  It then lists five unintended, harmful side-effects of the ongoing wage cap, including:

  1. Over the five years from 2011 through 2016, the state’s public sector wage suppression reduced consumer spending in the state by a cumulative total of some $3.4 billion, harming businesses large and small.
  2. Australia’s national GDP was reduced by an estimated cumulative total of almost $8 billion over the 2011-16 period.
  3. The NSW government’s wage austerity therefore reduced its own revenue (through that reduction in GDP) by an estimated $1.2 billion over the 2001-16 period.
  4. Each public sector worker’s “workload” increased by 7.5 percent in the last five years – yet the wages policy in fact suppresses true productivity growth in the public sector.
  5. The NSW government’s extraordinary interventions, removing normal wage bargaining rights from a significant and influential section of the state labour market, have contributed to the unprecedented stagnation of wages in the overall state labour market – one that the government itself admits is hampering both economic growth and fiscal well-being.

The longer the wage cap remains in place, the larger will these costs (of foregone consumer spending, offsetting reductions in state revenues, and the spillover impact onto private labour market outcomes) become.

This report was commissioned by the NSW branch of the Health Services Union.

Full report