In recent days, governments at all levels have announced or proposed unilateral measures to freeze pay for public servants. Given the vital role that public sector workers are playing in all aspects of Australia’s response to the COVID-29 pandemic, and the personal risks that many of those workers are facing as a result of their dedicated service, this is a morally questionable moment to launch another attack on public sector pay. But further suppressing incomes for public servants would also be economically destructive, not just ethically misguided, at this dangerous moment in Australia’s economic history.
This paper reviews the consequences of pay freezes for both the workers affected by them, and the broader economy. Its main findings include:
- Freezing pay for even short periods of time 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.
- Pay freezes in the public sector are known to spill over into weaker economy-wide wage growth through three key channels: a composition effect, a demonstration effect, and a macroeconomic effect.
- At least 35% of the purported ‘savings’ from freezing 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.
- 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 postwar era.