Understanding the Public Sector Wage Freeze

By Cole Reyno

On 4 May, the Labour Government announced a three-year extension to the public sector pay freeze. This freezes the wages of public sector workers earning over $100,000 per year, and most earning over $60,000 per year except in “exceptional circumstances”.[1] This policy will largely impact those workers described as Labour’s traditional voter base, and thus begs the question of why such a policy has been decreed.[2]

Public Service Minister Chris Hipkins has called the wage freeze “the opposite of austerity”, arguing that wages will increase for lower-income workers rather than those with higher income.[3] While it is technically accurate that within the public sector income inequality would decrease, this fits the definition of an austerity measure since it decreases government spending.[4] Moreover, due to inflation rates being positive and likely remaining so, in line with the Reserve Bank’s long-term target of 2% per year,[5] a nominal pay freeze is a pay cut in real terms. That is, public sector workers with frozen wages will have reduced purchasing power as prices of goods and services increase.

Chris Hipkins announcing the pay freeze
Source: https://www.newstalkzb.co.nz/on-air/heather-du-plessis-allan-drive/audio/chris-hipkins-public-service-minister-on-the-three-year-pay-freeze-for-civil-servants

Given the real pay cuts over three years, what calculations are the Labour Party running, whether numerical or political?

Numerical

This is part of Labour’s Budget 2021 which they released on 20 May. Their operating allowance for 2021 is $3.8 billion, while for each year 2022–2024 it is $2.7 billion. Labour projects that net core Crown debt to GDP percentage would remain below 50% up to the 2025 forecast.[6] Thus, Labour has deemed public sector pay above $60,000 not worth increasing debt for. This is despite public sector salaries growing 15% slower than private sector salaries between the second quarter of 2009 and the first quarter of 2018.[7]

Political

This wage freeze can be contextualised with the Budget 2021 announcement and the lesser reported-on 7 May announcement on Fair Pay Agreements.[8] Radio New Zealand’s ‘Politics’ section contained 59 articles between 5 May (when they published their first article about the pay freeze) and 14 May (before the leadup to the Budget 2021 announcement on 20 May) – but only one about the Fair Pay Agreements.[9]

So what are these Fair Pay Agreements, and why are they significant?

The Government’s proposal would enable sectoral collective bargaining, where an entire sector of an economy (e.g. supermarkets) could have minimum standards across all firms, rather than different standards for different firms (e.g. Countdown or New World). These labour conditions, such as wages, working hours and vacations, would be negotiated by multiple businesses and unions within their intended sector. Any union can initiate these negotiations, by having the support of either 1000 workers or 10% of that sector. If this level is not reached, negotiations are still possible if a “public interest test” is met where the sector has critical employment issues like low pay or limited bargaining power. Then ideally, negotiations succeed, improving working conditions. Naturally, the Council of Trade Unions (CTU) and First Union support Fair Pay Agreements, with the former’s president stating these signal “the biggest change to workplace laws in several decades” by setting “a more balanced relationship between working people and employers”.[10]

This does however beg the question of what to do if negotiations fail. Additionally, business groups like BusinessNZ and the Employers and Manufacturers Association (EMA) fear widespread strikes and firms being forced to acquiesce to unions’ demands, lowering firms’ bargaining power too much since they must then agree to the arbitration done by the Employment Relations Authority (ERA).[11] Opposition parties were scathing against Labour. ACT attacked the “undemocratic” Fair Pay Agreements as “compulsory unionism” that will be a “wrecking ball on the economy”, while National lambasted them for increasing “centralisation, regulation, bureaucracy” and government power.[12]

It is clear that Fair Pay Agreements will have substantial economic impacts and is accordingly controversial. Yet as above, media coverage focussed much more on the public sector pay freeze than Fair Pay Agreements.

This could be a mere coincidence. Or more likely, part of Labour’s political strategy.

Duncan Grieve of The Spinoff asks whether there is “a noble method to the political madness of the pay freeze”.[13] He opines that the two fastest ways to alleviate poverty are to raise welfare rates and raise wages of lower-income workers. Under the 2021 Budget, benefits will be raised by between $32 and $55 per week.[14] Meanwhile, the latter should occur given no pay freeze if below $60,000. Therefore, it makes sense to freeze higher-income workers in the public sector, to leave more funds for implementing these two measures.

Jon Johansson, political scientist, and former Chief of Staff to Winston Peters, cares less about economic numbers and more about polling numbers. He highlights the importance of focus groups on influencing the ruling party’s policies and their marketing.[15] Johansson agrees that Labour’s recent policies “smacked of political strategy”, and suggested they focus-grouped soft-National supporters who helped deliver Labour their majority of vote share and seats in 2020,[16] after voting for John Key in previous elections. These swing voters would supposedly tolerate Fair Pay Agreements and high spending in Budget 2021 by freezing public sector wages of stereotypical “Wellington pay-pushers”. Meanwhile, Labour should satisfy their base with the Fair Pay Agreements, trading them for the pay freeze. “Classic triangulation” is Johansson’s summary: satisfy the political left and right by adopting policies from both, and insulate themselves from both sides’ attacks.

This paradoxically appeared to have worked. One would think that after the announcement and ensuing media firestorm, Labour would have received at least a minor backlash in party support. Unions of teachers,[17] healthcare workers,[18] and Police and Corrections officers[19] all criticised the Government’s pay freeze. But the latest Newshub–Reid Research poll shows Labour actually rebounding back to having a majority of the country supporting them (52.7%) – conducted between 7 and 13 May (after the announcements on 4 and 7 May).

Party Vote intention
Margin of Error (maximum): 3.1%
Labour: 52.7%
National: 27.0%
Greens: 7.1%
ACT: 6.9%
Māori: 1.2%
Source: https://www.newshub.co.nz/home/politics/2021/05/judith-collins-allegations-of-maori-separatism-not-working-for-national-in-newshub-reid-research-poll

Conclusion

To summarise, the public sector wage freeze aims to:

Genuinely reduce the size of the debt, without expecting backlash
Allow funds to be used for raising welfare rates and other big spending in Budget 2021
Make Fair Pay Agreements tolerable to swing voters, by showing some fiscal restraint against bureaucrats
Neutralise FPA attacks from the right by distracting media with backlash from the left, securing swing voter support

Sources:

[1] https://www.nzherald.co.nz/nz/covid-19-coronavirus-public-sector-pay-freeze-no-increases-for-staff-on-100000/HZ3PYF6F2TCYOXQMFPA75TEROI/

[2] https://www.rnz.co.nz/programmes/the-detail/story/2018794549/pay-freezing-out-your-traditional-voter-base

[3] https://www.rnz.co.nz/news/political/442290/chris-hipkins-on-public-sector-pay-it-s-the-opposite-of-austerity

[4] https://www.investopedia.com/ask/answers/12/austerity-measures.asp

[5] https://www.rbnz.govt.nz/monetary-policy/inflation

[6] https://www.treasury.govt.nz/sites/default/files/2021-05/b21-at-a-glance.pdf

[7] https://www.nzherald.co.nz/business/fact-check-are-public-sector-salaries-higher/FAVMHLHJFD5VJJ4SW66CJSMPTY/

[8] https://www.scoop.co.nz/stories/PA2105/S00062/fair-pay-agreements-to-improve-pay-and-conditions-for-essential-workers.htm

[9] https://www.rnz.co.nz/news/political. Accessed 20 May 2021.

[10] https://thespinoff.co.nz/politics/08-05-2021/the-governments-fair-pay-agreements-plan-is-a-big-deal/

[11] https://www.nzherald.co.nz/nz/unions-vs-businesses-fair-pay-agreement-news-staunchly-divides-factions/HWQG7O76VMO5QHCSKQDOB5IAKM/

[12] https://thespinoff.co.nz/politics/08-05-2021/the-governments-fair-pay-agreements-plan-is-a-big-deal/

[13] https://thespinoff.co.nz/politics/12-05-2021/is-there-a-noble-method-to-the-political-madness-of-the-pay-freeze/

[14] https://www.treasury.govt.nz/sites/default/files/2021-05/b21-at-a-glance.pdf

[15] https://www.stuff.co.nz/national/politics/opinion/300306462/influencing-political-policy-and-the-triumph-of-marketing

[16] https://elections.nz/media-and-news/2020/2020-general-election-official-results/

[17] https://www.stuff.co.nz/national/education/300301094/educators-slam-three-more-years-of-pay-restraint-for-public-servants

[18] https://www.rnz.co.nz/news/national/441928/fears-kiwi-nurses-and-doctors-will-leave-nz-due-to-salary-freeze

[19] https://www.stuff.co.nz/national/crime/300300422/cops-prison-officers-slam-public-sector-pay-freeze-bombshell


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