Public sector wage freeze could backfire

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Public sector wage freeze may result in workplace churn, disengaged public servants, writes David Grindle.

Thanks for your hard work over the last year, but…

This week the Government laid out the design of the Fair Pay Agreement system for bargaining and setting minimum terms and conditions of employment across an occupation or industry (more on the detail of this in the next column). It’s odd then, that in the same week it also announced that public servants earning more than $60,000 will only be offered pay increases under exceptional circumstances, for the next three years – a wage freeze, in effect.

Back in 1982 then Prime Minister Robert Muldoon imposed a wage and price freeze to try and combat inflation. Many economists, politicians and the public were sceptical and ultimately, the freeze ended when the 1984 Labour Government came to power.

While the wage freeze announced in May 2021 is set to last for three years and does not have a price freeze component to it, nor does it have an ability to account for inflation or cost of living increases.

The current Government’s wage freeze falls into three broad categories:

  1. Public servants earning up to $60,000 a year are free to negotiate pay and salary conditions and there are no new limits placed on the employer’s ability to agree to such requests;
  2. Public servants earning more than $60,000 a year will only be offered pay increases under exceptional circumstances;
  3. Senior staff earning more than $100,000 have had their pay frozen entirely.

Since the original announcement, the Government has clarified that the freeze is not absolute and that employees can still move through salary bands that may exist within their collective employment agreements. However there is still some clarity required. Describing the pay freeze as lasting for three years is also somewhat charitable given that last year all agencies were asked by the Public Service Commissioner to maintain restraint with no or minimal pay bumps until June 2021.

About 25% of the public sector earn below $60,000 per annum. Understandably, the government wants pay increases to be targeted to that cohort of employees. However, the freeze does not apply to people contracting to government departments, leaving a significant portion of people expenditure within government (more than $1bn each year) unaddressed.

Limiting public servants’ ability to increase, or even negotiate, salary increases over the next three years is unusual. Compared to the rest of the world, New Zealand is well-placed to respond to the costs of the COVID-19 pandemic. Our employment rate is relatively low at 4.7%, and our debt to GDP ratio is less than the majority of our trading partners.

There are other anomalies too, such as the arbitrary $60,000 threshold as the point at which an employee may no longer negotiate an annual salary increase. This figure is unrealistic given the increase in housing and domestic costs. In addition, previous wage freezes have not been targeted at a certain portion of workers, and they came with tools that could be used to adjust the freeze to take account of things such as inflation and escalating prices.

The three year term of the wage freeze is optimistic given the reaction from a range of associations that represent the employment of government servants. For example, there are approximately 20,000 Public Service Association members who will be involved in collective bargaining later this year, with negotiations likely to be more heated than we have seen in recent times. The PSA has stated publicly that many of its members “wonder why the government would punish them after a year of sacrifice, hard work and success protecting New Zealanders from COVID-19” – a sentiment shared by many.

House prices in Wellington are increasingly exponentially while the pay received by more than 100,000 public servants employed there will be largely static for the next three years. While the wage freeze will bring about bottom line savings, the likelihood is that workplace churn and disengaged public servants will result in them increasingly looking for employment in the private sector. At a time when the Government is trying to push through significant projects, while staying on top of a pandemic, the consequences of their actions may be the antithesis of what they had anticipated.

If you need some help or guidance, our experienced, specialist employment law team will be happy to help. Please give one of us a call or contact your usual WRMK lawyer for advice. You can view our Employment Law team here.

WRMK Lawyers takes all reasonable care to make sure that the information in this article is up-to-date and accurate at today’s date. It is necessarily general information and not intended as legal advice to be relied upon.

The views expressed in this article are that of David Grindle. This article was first published in the Northern Advocate on 19 May 2021.

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