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.
This paper considers three distinct categories of losses resulting from a pay freeze:
- Loss of real purchasing power while the freeze is in effect.
- Loss of future income resulting from the permanent downward shift in pay trajectory.
- Loss of superannuation contributions and investment income resulting from lower pay.
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%.