Why public sector pay caps are bad for the economy

Source: Troy Henderson and Jim Stanford Centre for Future Work at the Australia Institute

Why public sector pay caps are bad for the economy

Source: Troy Henderson and Jim Stanford
Centre for Future Work at the Australia Institute
1.    Pay caps affect broader wage growth through:

A composition effect
This is the direct impact of lower public sector wage growth on the overall weighted average wage growth of the total labour market. Governments, state and federal, are the biggest employers in Australia.

A demonstration effect
This is the impact of suppressed public sector wages on expectations and wage setting by private sector employers. Public sector wage policies are a visible benchmark for wages in the private sector and the public sector is the largest employer in the country.
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A macro-economic effect
By suppressing wage growth, incomes and consumer spending are undermined. Public sector austerity ensures that overall aggregate demand is reduced. This affects retail trade and other consumer sensitive areas.  READ MORE.