Why freeze public sector wages?

I am not a fan of policies that freeze wages. However, the idea that the government will freeze the wages of public sector doesn’t seem to really be being debated – outside of the seemingly biased view of the public sector union.

Now, this is one of those rare cases where I think the public sector union is right – and everyone else supporting the policy is wrong. Freezing public sector wages is a bad policy. (Disclaimer – I work in the private sector, so this really doesn’t impact on me directly).

Currently we are experiencing a sharp re-adjustment in both the size and composition of our economy. Now, in the medium term we expect to return to some level of economic activity – but there are fundamental adjustments between roles that have to occur. This implies that we need some stuff to change in the labour market.

In the medium term there will be some roles that are more highly valued than they are now and some roles that are less highly valued. As a result, we need wages to adjust such that people will train and move into the more highly valued roles. If we freeze wages we aren’t letting this happen. Inside government there are areas where we need more training and where we need more employees – in other parts of government we have staff we don’t need. If the government could recognise this and change wages accordingly (it would be nice to have some market mechanism to do this) then we ensure that our public sector becomes “more productive”.

Now, the government is always complaining about the productivity of the public sector – but freezing wages will not help to improve this. In fact, it is a step in the wrong direction!

  • “(Disclaimer – I work in the private sector, so this really doesn’t impact on me directly)”

    Surely your skills and those of many civil servants are pretty close substitutes, so you’re really in the same market. 😛

  • That is the call I was waiting for 😉 I was being a bit cheeky by saying “directly”

    Still, under my suggestion, if demand for economists has been artificially inflated by public sector hiring then we should be cutting the wages of public sector economists instead of freezing them. As a result, I would be advocating lower future real wages for myself.

    As I value future income positively I don’t see a conflict of interest 😉

  • Oppps, I forgot to mention the case where public sector economists are undervalued.

    In this case we should increase the wage we pay public sector economists, and that would increase my wage indirectly. But if we are doing it because we need more, higher quality, economists in government I am willing to accept a higher wage in the social interest 😉

  • I’m amazed anyone works in the public sector. They are treated like shit by the media and their employers.

    As for wage freezes, most large corporates in NZ have already frozen wages, so if you want a pay rise you need to change jobs. The last time things were like that, Muldoon was PM and people DID change jobs – frequently. In 1983/4 I had 3 different employers and managed to increase my wages by more then 50% in just 12 months.

    In reality, the “freeze” was highly inflationary as employers created new positions with higher pay to attract the people they needed.

  • Well, the US has a pretty flexible labour market and look what’s happening to jobs there! Europe is a bit less flexible and, so far, they’re better off. The government sees the relationship between job security and labour market flexibility, so it’s doing the logical thing and freezing the market entirely 🙂

  • StephenR

    I’m amazed anyone works in the public sector. They are treated like shit by the media and their employers.

    Yah but the pay is pretty damn good.

  • @StephenR

    A few at the top are paid well, but not as well as in the private sector. School teachers, Corrections Officers, police, the military and nurses are all modestly paid and many in number.

    Yes, many government jobs do pay better than the $12.50 / hour that seems to be the maximum wage for new jobs.

  • StephenR

    I thought you were alluding to bureaucrats who were “treated like shit” – I hardly think the media and public look down on nurses and teachers.

  • What would Hayek say

    For an economist the public and private sector are close substitutes because the skill set applies in both environments. You could say the same applies for all other professionals as their skills can be utilised in the public and private sectors. However there is structural issues that are being overlooked by this simple analysis. For most of the medical profession, teachers and social workers, all of the police, fire service and defence you have an environment of a monopsony employer(one employer – the state) combined with effectively a monopoly supplier (the union and collective agreement). Effectively under this environment you have effectively no market within which to establish the “price/value” of an employee. You only have incentives on both parties for rent extraction behaviour. This is evidenced by willingness to strike (i.e. you need our labour and if we withdraw it the public will demand you “fix it” at whatever cost) and willingness to freeze (go ahead and strike, the public applauds my cracking down on your wages).

    In the absence of price information, the public sector seeks other mechanism’s by which to judge their relative worth. Generally this is done by benchmarking themselves against each other. So what you get is a system where the public sector benchmarks itself against each other. So Nurses look at how much doctors are paid and seek remuneration levels similar (because they also are well qualified medical professionals), social workers ay “hey” we aso are qualified and impt and you need us as much as nurses so we will have a pay rise also. Then you get police going well we face a dangerous world and need to keep a relative wage to social workers so we need an increase. This leads to the fire service who say well were similar to police so well have the same if not more than what they got to keep relativities. Then you have defence with the same story. Teachers pipe up with the same story and so do doctors. At the end of the day are everyone has moved to adjust against each other you come back to the start and repeat the cycle. At no point though is there any information or incentives to change behaviours, all you get is either an inflationary spiral of wage increases until the public is willing to back the monopoly employer and then you have the reverse. This is a classic regulatory economics issue discussed by Posner and picked up in public choice theory.

    So, whats the real story/problem. Lack of price information due to the institutional settings. Impact for the private sector is minor, except for the potentially large effect of public sector generated inflation (wage spiral) and increased taxation to feed the wage increases with potentially limited offsetting productivity improvement. Generally it is assumed that inputs = outputs for calculation of government in GDP (e.g. the g component of C+I+G+(x-m). However I understand that better statistical information from the UK and EU suggest that Inputs=Outputs assumption is untrue and with outputs beign lower than inputs. This suggest stated levels of GDP growth in many countries has been lower than offical statistics have been saying.

    Why does this matter, at the end of the day it all comes down to productivity and how we can ensure we are getting the best out of NZ given limited resources available. I support an effective and efficient public sector and this can mean paying the public sector higher wages in some cases than private sector, but we need meaningful “price’ information to be able to inform that decision. The current institutional settings does not allow this and results in circular debates.

    Since the measurement of productivity in the public sector is poor

  • Pingback: Free Credit Report Blogg()

  • Pingback: AT&T Workers Create “Ready to Strike” Ringtone [Voices] — Hobby Cash: Make Cash Blogging About the Things You Love()

  • Pingback: Need Money Blogg()

  • @Truth Seeker

    Well, depending on where you work you get good hours, good pay, and job security …

  • @rauparaha

    😀 hahahahaha

    I think unemployment over much of Europe is already much higher – and given the greater level of wage rigidity it is only going to climb 🙁

    Also, as they are stuck in the Euro, the small countries that are struggling can’t devalue to lower effective real wages – which is a killer

  • @Steve Withers

    Huh, pay in theses sectors has risen rapidly over the last decade – I would now NEVER call teachers underpaid. Also, society respects teachers and nurses – it is the core sectors (who are very well paid) that get the slack

    @StephenR

    Good points.

  • @What would Hayek say

    “Effectively under this environment you have effectively no market within which to establish the “price/value” of an employee”

    Agreed.

    “I support an effective and efficient public sector and this can mean paying the public sector higher wages in some cases than private sector, but we need meaningful “price’ information to be able to inform that decision. The current institutional settings does not allow this and results in circular debates.”

    Agreed.

    “Since the measurement of productivity in the public sector is poor”

    Agreed.

    However, freezing wages – and not attempting to actually discover market value – is a very arbitrary way to go about things.

    Even if they don’t have a proper price signal they have a quantity signal – there are areas where they get lots of applications and areas where they don’t. Fiddle wages based on that to start with – then they can start thinking a bit more 😉