More than just ‘morally questionable’ – public sector pay freezes



More than just ‘morally questionable’ – new research shows that public sector pay freezes could push economy from recession to depression

Both state and federal governments are considering wage freezes for government employees. All government workers whether they be doctors, nurses, cleaners and security staff deserve their annual pay rise for the incredible work they are doing to protect our community while putting themselves at risk.

While the NSW Treasurer has stated that frontline health workers such as doctors and nurses will receive their annual pay increase he has not made the same commitment for other public sector workers such as our colleagues working as firefighters, prison officers, research staff, domestic violence workers and teachers.

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

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.

Dr. Jim Stanford, Director of the Centre for Future Work said “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”.

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.