Public Sector Pay Freezes Could Push Economy From Recession to Depression

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.

Key findings:

  • At least 35% of the purported ‘savings’ from freezing public service 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.
  • Pay freezes in the public sector spill over into weaker economy-wide wage growth through three key channels: a composition effect, a demonstration effect, and a macroeconomic effect.
  • Freezing pay for even short periods 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 local council workers would reduce career earnings by over $100,000, and superannuation accumulations by $17,500.
  • 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.

“Pay freezes are being imposed at the very moment when public sector workers such as healthcare workers, first responders, teachers and social service providers are performing vital tasks, at personal risk to themselves, to support Australians through the pandemic. Freezing pay for these essential workers is not just morally questionable -- it's also a major economic mistake,” said Dr. Jim Stanford, Director of the Centre for Future Work.

“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 ‘tighten the purse strings’ at a moment when governments are about to incur their largest deficits in history.

“However, our research shows these arbitrary pay freezes are both unfair and economically counterproductive. Government policy should be driven by economic reality, not political optics.

“Public sector wage austerity imposed after the Global Financial Crisis helped 'lock in' historically slow wage growth in the private sector in the years that followed. Since then, wages in Australia have grown at their slowest sustained rate in the post-war era.

“Australia cannot tolerate a further deceleration of wage and price inflation. Inflation was already close to zero, chronically falling below the RBA's inflation target, even before the economy was hit by the double shock of bushfires and COVID-19.

“Economy-wide deflation is associated with long-term depression. Australia cannot risk letting any COVID-19 recession turn into a depression. At this pivotal moment, governments’ priority should be anchoring price expectations, supporting nominal incomes, and contributing to aggregate demand. Normal wage gains should be implemented in the public sector and encouraged in the private sector.” 

The new report from the Centre for Future Work, The Same Mistake Twice: The Self-Defeating Consequences of Public Sector Pay Freezes, by Troy Henderson and Jim Stanford, can be downloaded here.


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