Workers can transfer from wage freeze

Public servants, such as police are free to  make decisions about their employment. PHOTO: GETTY...
Public servants, such as police are free to make decisions about their employment. PHOTO: GETTY IMAGES
You would be hard pressed to find an economist who would argue against the merits of fiscal responsibility and controlling government debt.

This is why it was so hard to believe the Government’s rationale for a public sector wage freeze when it is already pouring upwards of $50billion into the economy in response to Covid-19.

But fiscal responsibility and the need for “moderation and restraint” were indeed the justifications for the proposed three-year freeze — or “restraint” — on public sector wages over $60,000 (except in exceptional circumstances).

Responding to pressure from public sector unions and workers, the Government has suggested routine step-based pay increases could be applied more widely, the policy could be reviewed a year earlier and cost-of-living increases accounted for.

On the face of it, however, the policy would adversely affect approximately 75% of public sector workers, or about 15% of all workers in New Zealand.

Meanwhile, the vast fiscal stimulus package in response to the pandemic has helped keep businesses alive and workers in jobs. It has also driven up New Zealand’s debt-to-GDP ratio and is hardly the work of ideological slaves to fiscal responsibility.

At some stage the public debt will need to be paid off by increasing taxes and/or reducing government spending. But nobody would argue the economy is out of the woods yet, so the public sector wage policy was something of a mystery.

Reducing the real incomes of 15% of the labour force would have a significant negative impact on spending. This, in turn, would work to counteract the benefits of the stimulus spending in the first place.

It would also likely have other unpleasant consequences once those affected made their own decisions in response to their changed circumstances.

Labour market realities

The Government has signalled its proposed wage restraint was part of a bigger drive to increase the relative wellbeing of those on lower wages and improve the lives of poor and disadvantaged Kiwis.

As part of this, the minimum wage has increased by 30% over the past four years. But while this has undoubtedly gone some way to raising the standard of living of those on low wages, relative to those on higher wages the gains are likely to be offset by other forces.

The labour market works in mysterious ways to ensure people who create more value get paid more. Workers are compensated for their education and training, experience, skills and the level of responsibility required in their roles.

When workers with minimal training and experience get a pay rise, others in the same organisation are also likely to demand an increase to recognise their training and experience.

But if everyone’s wages go up, and if the overall productivity of the economy is not growing at the same pace, there is inflationary pressure and the higher wage may not increase workers’ purchasing power by much.

Minimum wage increases also tend to restrain employment because fewer employers can afford to hire. The potential for inflation and unemployment reduces the ability of minimum wage increases to lift people out of poverty.

Arguably, then, the Government has opted to improve the relative lot of those on low incomes by suppressing the incomes of those who are doing better.

In other words, when you don’t like how the market works, manipulate it. But if you do, you should be prepared for it to bite back.

The real message of a pay freeze

Tampering with the workings of a market can lead to unintended consequences. In this case, they will probably be due to the actions of those most affected.

The police officers, teachers, nurses and other public servants whose wages are on hold will now make decisions about their employment they deem best for themselves and their families. In doing so, they will simply be responding to the incentives created by the Government’s policy.

How have the incentives changed? You need only ask how you might react if your pay had just been reduced relative to what you could be paid in the private sector or in the equivalent job overseas.

It shouldn’t come as a shock that some will look for better opportunities outside New Zealand’s public sector. What’s more, school leavers and others contemplating a public sector career may choose alternatives.

All of this will worsen the public sector skill shortage. And the underlying productivity of the economy will be compromised.

There are alternatives

There’s no denying the Government has to make tough decisions to get us out of the fiscal hole Covid-19 dropped us in. But instead of manipulating the labour market, maybe the answers lie elsewhere.

Rather than freezing or restraining wages, the Government could encourage more people to invest in the education and training that will increase their productivity and, in turn, allow them to earn higher wages.

This is already happening with the Targeted Training and Apprenticeships Fund, making some vocational training temporarily free. It appears to have had good uptake.

To make sure the momentum continues, it’s important that investment in education bears a return, which should happen if the labour market is left to do its job. As a bonus, the increase in the productivity of the workforce will lift the wellbeing of everyone.


  • Laura Meriluoto is an associate professor of economics at the University of Canterbury.


I disagree with a number of Ms Meriluoto's arguments.
While I agree that public debt needs to be repaid I reject her clear inference that this needs to happen quickly and therefore must fall to the current generation of workers. Public debt repayment can be spun out over several generations and it is fair that this is so. Future generations will benefit from the forward sightedness of the current govts policies and it is only fair that they help in the payment for this. A quick study of our history shows this was the case with the large amounts borrowed by colonial Govts to build our nation.
Secondly, her assertion that workers earning minimum wage lack higher education and training seems to me to be an expression of academic arrogance rather than representing the reality for NZer's. Large numbers of university qualified people are working in minimum wage jobs. A significant number of these jobs require high levels of training. Her assumption is insulting.
All in all this piece has served to further convince me that economics and economists operate at the same level as astrology and astrologists, barely above the level of witchcraft and on a par with meteorology and seismology






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