As the first economic data revealing the horrific impact of the coronavirus are released, governments are perversely opting to freeze public-servants’ wages. However, a new report shows this will not only create large ongoing impacts for workers, it counterintuitively acts to reduce economic activity at time when the economy needs all the growth it can get.

A month ago I suggested a few measures to watch to see how the economy was travelling. This week has seen the release of the first lot (with the March unemployment figures out later this morning), and the picture is not good.

Morrison talks of ‘snapping back’ but the economic recovery from coronavirus will be slow | Greg Jericho Read more

Yesterday saw the February travel data, and in a sense the news is OK – the annual fall in short-term arrivals to February was 18% – in line with what occurred after September 11 and during the Sars outbreak:

The problem of course is that the number of arrivals will fall to effectively zero.

Already in February we saw the number of short-term arrivals from China fall by 76%, from 81,600 in January to 19,500. That fall alone accounted for 67% of the drop in total visitor numbers.

The NAB monthly business survey on Tuesday revealed a fall in the business conditions index from minus 1.7 (below the long-term average) to a new record low of minus 21:

It was also the biggest one-month fall ever recorded. In October 2008, at the start of the GFC, the index fell 9.1 points; this month saw a 19.3 point fall.

This is not surprising given not only the current crisis but because, as the latest building activity figures show, even before the crisis the economy was struggling.

In the four quarters to December last year, private-sector building activity fell 8.2% –the worst fall for a decade:

It’s never good to experience the worst growth for a decade right before a global pandemic causes a shutdown of the economy!

In response, both federal and state governments have embarked on significant fiscal spending to keep the economy from completely cratering while people mostly stay at home.

This is a sensible response. And apart from the rather odd determination of allowing the jobkeeper allowance only to casual workers who have been with an employer for more than 12 months (an arbitrary period set with no reference to economics) and a lack of access for contract workers, it has been well targeted.

But coupled with this has been a decision by the Morrison government, and extended in NSW and Queensland, to freeze public servants’ wage increases.

The rationale is, as the assistant minister to the prime minister and cabinet, Ben Morton, suggests, that “while communities are doing it tough, it’s important the APS helps share the economic burden.”

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Except that rationale lacks economic logic, and as a new paper by progressive think tank The Australia Institute’s Centre for Future Work shows, it will also have ongoing costs for public servants well beyond six months.

The problem, as the authors of the paper, “The Same Mistake Twice: the self-defeating consequences of public sector pay freezes”, note is that a wage freeze is not made up in later years.

Troy Henderson and Jim Stanford argue that “the reduction in wage levels due to the wage freeze is reflected in a permanent reduction in the nominal wage base. Hence workers continue to incur income losses long after the wage freeze has been lifted.”

This is because the forgone wage freeze is never caught up. If you freeze 2.5% wage growth for one year, the government won’t give a 5.1% pay rise in a year’s time to make up for the lost year.

So you are always that one year of 2.5% growth behind.

Henderson and Stanford calculate for an APS worker with 20 years left of employment the six-month wage freeze will cost on average $23,532 over their working life. For the average Brisbane municipal worker, who is about to experience a two-year wage freeze, the cumulative cost is on average a stunning $100,842:

But the issue is not just the cost to individual income.

Freezing public sector income not only acts against efforts to use public spending to boost the economy, it also hurts future private-sector wage growth.

Henderson and Stanford note that the public-sector wage restraint that occurred after the GFC “led the way” in “ushering in a more serious and lasting downturn in wage growth ... that started about three years after the GFC hit”:

The desire to limit public servants wage rises also feeds into a stereotype that holds no water.

Over the past decade the average wages of public administration and safety workers has risen 30.2%, compared with 29.7% for all private sector workers – hardly a sense of “fat cats” doing better than others:

And if we look at ACT public-sector workers, who are overwhelmingly commonwealth public servants, not only have they received lower pay rises than other public-sector workers, but lower even than private-sector workers:

Freezing public servants’ wages is a nice sop to talkback radio hosts, but it actually serves to compound the lack of growth in the economy. And importantly, it signals that private sector wages growth will continue to falter even after this crisis has passed from a sense of need for austerity at a time when we need growth.