Making the Same Mistake Twice
With Australia's economy sinking quickly into a COVID-19 recession, and governments allocating vast new sums to programs to protect Australians against the health and economic effects of the pandemic, an old-fashioned impulse to adopt fiscal austerity is becoming visible among some governments. In particular, leaders of several governments (federal, state and municipal) have already announced plans to cancel normal pay rises for their public servants.
Pay freezes are being imposed at the very moment when public sector workers - from health care workers to first responders to social service providers - are performing vital tasks, at personal risk to themselves, to support Australians through the pandemic.
But freezing pay for these workers is not just morally questionable, given the sacrifices they are making: it's a major economic mistake, too.
Government leaders suggest that pay freezes are a reasonable and temporary sacrifice. Other Australians are suffering, and hence public sector workers should share their pain (whether that helps anything or not). But for public sector workers, pay freezes impose a long-term, growing cost. Our simulations show that typical public sector workers would lose between $25,000 and $100,000 over their careers, as a result of the pay freezes that have been proposed recently by federal, state and municipal governments.
Perhaps more dangerously, freezing the pay of public sector workers has been shown to spill over into reduced wage growth in the private sector, too. Wage austerity imposed in the public sector after the GFC of 2008-09 contributed to the 'locking in' of historically slow wage growth in the private sector in subsequent years. Since then, Australian wages have grown at their slowest sustained rate in the postwar era.
But 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. Freezing wages in the public sector (likely to be mimicked by private sector employers) would add to deflationary pressures, possible sparking an outright decline in average prices. Economy-wide deflation is associated with long-term depression. Government's top priorities at this dangerous moment 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.
Please read the full report The Same Mistake Twice: The Self-Defeating Consequences of Public Sector Pay Freezes by Troy Henderson and Jim Stanford.