The Long-Term Consequences of Wage Freezes for Real Wages, Lifetime Earnings, and Superannuation

by Jim Stanford

New research from the Centre for Future Work has dramatised the lasting consequences for workers’ lifetime incomes – even after they retire – of wage freezes.

A wage freeze is often described as a “temporary sacrifice,” that supposedly ends once normal annual wage increments are restored. However, this report confirms that the legacy of even a temporary pay freeze is a permanent reduction in lifetime incomes and superannuation, which can easily ultimately result in hundreds of thousands of dollars of lost income. These long-term effects are illustrated with reference to a real-world example: an 18-month pay freeze imposed on workers at Jetstar in 2014-2016.

Many Australian employers have frozen the pay of their workers in recent years, typically justified on grounds of temporary financial duress. However, those pay freezes have a lasting negative impact on the long-run trajectory of wages. As a result, workers lose tens of thousands of dollars of income through the rest of their careers. To cap the losses, employers must implement special one-time catch-up pay increases to restore the pre-freeze trajectory of wages.

To illustrate the lasting, cumulative impact of pay freezes on workers’ lifetime incomes, a new Briefing Paper from the Centre for Future Work considers the case of an 18-month wage freeze implemented in 2014-16 by Jetstar. The pay freeze was implemented amidst financial losses at the airline. However, since then the airline (and its parent firm, Qantas) have returned to strong profitability, and executive compensation has soared. Normal 3% wage increases were restored beginning March 2016, and a one-time bonus payment was made at that time as “compensation” for the sacrifice of Jetstar workers. But the current incomes of Jetstar workers are still thousands of dollars per year lower than if the pay freeze had not been imposed.

The report considers three distinct categories of losses resulting from a pay freeze:

  1. Loss of real purchasing power while the freeze is in effect.
  2. Loss of future income resulting from the permanent downward shift in pay trajectory.
  3. Loss of superannuation contributions and investment income resulting from lower pay.

The report quantifies these cumulating costs for the case of the pay freeze at Jetstar. Jetstar workers could lose $150,000 or more in cumulative earnings by the time they retire, despite the restoration of annual wage increments after 2016 and the one-time bonus. Moreover, workers’ superannuation accounts will also be suppressed accordingly: because of lower employer contributions (resulting from lower earnings) and lost investment income. On the basis of typical investment performance, the report estimates potential superannuation losses of $40,000 or more by the time Jetstar workers retire. Some workers could lose over $200,000 in lifetime incomes and superannuation because of the “temporary” wage freeze.

The only way to stop these ongoing losses from getting bigger (let alone to compensate workers for losses already incurred) is to implement additional catch-up wage increases that bring wages back to their pre-freeze trajectory. In the case of the Jetstar wage freeze, that would require a one-time increase of 6.1%.

The Jetstar case is just one of many instances of wage freezes being imposed on Australian workers in recent years, in both the private and public sector. The legacy of those wage freezes contributes to the ongoing stagnation of real wages in the Australian labour market, and to the historic shift in income distribution away from workers and toward businesses and investors. While it may seem as if a wage freeze is a “temporary” sacrifice, without offsetting catch-up adjustments it nevertheless continues to impose ongoing economic harm on affected workers.

Full report