March 24, 1980
Chart 1
rate of $5.45
Rates of Inflation, Recovery, and Cost-of-Living
Adjustment: 1972-1979
would
boost
each
Percent
Percent
would
0.2
wages
United
Automobile
Rubber
Workers
clauses than
Reco very Rates
one
a formula
cent
change.7
point
important
require
per hour
During
Workers
negotiated
"richer"
unions
in the next
unions
COLA
of the President's
wage-rate
inflation
This
year
the
The
pay
guidelines
45
1976
Inflation and the Current
Bargaining Climate
With
rates
inflation
low,
many
their
rates
it should
unions
COLA
COLA formula
of one
cent
change
in the
are
interested
clauses.
The
most
per hour
price
for each
index.
0.3
the price
be impossible
rose
were $5.00 per hour and
index
were equal
9 percent,
bringing
or to $5.45
pace. The COLA formula
a
to prevent
that the base
to 100. If
the
to 109, the wage rate would
rise 9 percent,
point
such
it may
in real wages. Suppose
index
increase
Under
formula
prices
common
1979
erosions
that
that
in improving
calls for a wage-rate
1978
wage in an industry
high and recovery
not be surprising
1977
a wage rate of $5.30,
price
have to
per hour, to keep
would only provide
however;
to attain
a
issue,
This
retired
point
is 7.5 percent.
1970s
have encouraged
use of COLA
ceived
somewhat
who
of
pension
unions
have pressed
of the
to be diverted
During
1980
older
for price
indexing
Workers
increase
industries.
Some
but to no avail. Recently,
Automobile
for part
is pensions.
the purchasing
benefits.
and
regular
the
to bargaining
than
COLA
into pension
1981,
The
settlement
large
of
the
prowage
benefits.
pension
issue
in the steel and
steelworkers
employees
are relain
terms.
ensures
ments.
this
that
in the
8. For more discussion on this point, see Mark S.
Sniderman and Roseanne K. Pajka, "Collective
Bargaining and Wage Standards in 1979,"
Economic Commentary, Federal Reserve Bank
of Cleveland, March 12,1979.
importance
Despite
wage
necessarily
greater
guarantee
than
be over-
group
smaller
larger
without
COLAs
receive
members.
clauses themselves
increases
do
wage hikes.
employees
than union
escalator
wage
may
without
receive
greater
do
than
the rate of inflation.
While unions
inflation,
it would
have learned
to cope with
be difficult
to argue that
they have benefited
has
probably
more
always
face
from it. In fact, inflation
made
troublesome
contract
for
pressures
union
to
Inflation and Cost-of-Living
Adjustment Clauses
that the group of
the
wage increases
re-
In this issue:
clauses,
experiences
many nonunion
Furthermore,
not
COLAs
than
those
wage increases
all employees
Likewise,
that
protection
of COLAs
with
settle-
have escalator
the finding
increases
COLAs,
not
not
widespread
suggests
COLA
better
did
in the
in negotiated
evidence
enjoying
employees
other
7. If the base wage were $10.00 per hour instead
of $5.00, a "one-cent-for-O.3" formula yields
$10.30, or 3 percent; a "one-cent-tor-OiZ"
formula yields $10.45, or 4.5 percent; a "onecent-for-O.'!"
formula yields $10.90, or the
desired 9 percent. This example illustrates why
formulas must be changed to keep real wage
gains from eroding.
While
stated.
a more
clauses
those
power
have
contract
high rates of inflation
infla-
strategy
members
on
Conclusion
employees
has eroded
where
<,ECONOMIC
B'COIt'lMENTARY
1981 coal negotiations.
than
certainly
real
is also a
will be important
Persistently
6 percent.
area in which
union,
arrangement
benefits
the
important.
industry
union
of
to be
industry,
remains
influence
institutional
pension
years
of
due to COLAs
reached
steel
benefits
Mine Workers
larger
bargaining
tively
major
17
continues
in the coal
encourage
tion affects
coal
United
security
expenditures
might be the case.8
will be critical
o
their
the guidelines
also
important
vided
also encour-
benefit
Another
United
50
rate
trigger
these benefits,
5
In the
job
about
security
in the
value of pension
as part of the settlement
health-insurance
55
Coun-
improve
adjustments
the
Inflation
and
Under
after
otherwise
10
adopt
were not counted
60
15
to
protection.
1979,
65
1975
be
few
averaging
As job
considerable
The guidelines
age
1974
threatened
COLA
in the past. This issue should
to other
for
the
and the United
cil on Wage and Price Stability
1973
1979
industries,
seniority.
years.
70
1972
that
negotiations
leaders,
deliver
both
who
im-
proved wages and pensions.
The views stated herein are those of
the author and not necessarily those of the
Federal Reserve Bank of Cleveland or of the
Federal Reserve System.
Research Department
Federal Reserve Bank of Cleveland
Post Office Box 6387
Cleveland, Ohio 44101
BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385
Total effective
By Mark S. Sniderman
increases
among
ployees have generally
unionized
em-
been larger in the past
An important
increases
few years than increases among nonunionized
due
employees.
clauses
As measured
by the Employment
Cost Index, for example,
workers
wage rates of union
40.1
increased
percent
between
nonunion
1975 and December 1979, while
wage rates rose 34.9 percent.l
Effective
wage-rate
September
collective
bargaining
percent
period,
the
adjustments
per
year
whereas
private
units
during
average
nonfarm
major
8.1
1972-1979
averaged
the
hourly
economy
overti me in manufacturing)
in
earnings
in
to
rose 7.6 percent
Mark S. Sruderrnan is Economic Advisor, Federal
Reserve Bank of Cleveland. The research assistance
of Michael F. Bryan is sincerely appreciated.
1. The Employment
Cost Index measures changes
in straight-time
average hourly earnings of most
private nonfarm
employees.
For more details
see BLS Handbook of Methods for Survey and
Studies, U.S. Bureau
of Labor
Statistics,
Bulletin 1910, 1976.
2. Effective adjustments
in major collective bargaining un its refer to agreements covering 1,000
or more workers. Adjustments
are due to current and prior settlements
and cost-of-living
agreements.
Average hourly
earnings
figures
refer to changes in the Hourly Earnings Index
from January to January. See BLS Handbook
of Methods for Survey and Study for information about series construction.
is the portion
cost-of-living
adjustment
(COLA)
agreements.
In 1972,
of the total effective
adjustments
resulted
in major
from
COLAs.
wage-
bargaining
1973from 19 to
During
insurance
tion,
policy
against
but benefits
inflation
insurance
tributed
throughout
Settlements
example,
usually
not
the
those
having this
union
automobile
dis-
sector.3
industry,
do not provide
in the
as an
infla-
uniformly
in the construction
typically
whereas
unanticipated
to employees
are
for
COLAs,
industry
do. In 1979, 9.3 mill ion employees
were subject
and about
to major bargaining
60 percent
a.
agreements,
had COLA clause pro-
tection.4
3. While it is possible to design a contract mechanism that lowers wage rates when the price level
declines, few-if
any-COLA
clauses in operation are so designed.
1974
1975
1976
1977
1978
1979
6.6
7.0
9.4
8.7
8.1
8.0
8.2
8.8
Percent
SOURCE:
1.7
4.2
0.7
3.0
2.6
1.3
10.6
18.6
4.8
2.6
1.9
3.2
3.2
1.6
2.8
3.7
2.2
20.2
25.3
3.0
3.2
1.7
2.0
3.7
2.4
In 1979, about 72 million people were employed
in the private
nonfarm
sector of the U.S.
economy.
With Escalator
21.3
19.8
First-Year
Settlement
2.8
3.0
3.0
29.3
34.1
Bureau of Labor Statistics.
power
and
market
conditions,
inclusion
their
employers
bargaining
faced
some analysts
should
of the
employees
analysts
would
wage increases
ees with
be irrelevant
in the
similar
argue, the
would
without
long run.
differ
These
insurance,
would
get
as
large
in the first year of their
Comparing
employee
among employ-
COLA
COLAs
increases
new contracts.
to the wages
groups,
the experience
however,
of
indicates
that those groups with COLAs fare better, on
average, in every year examined
First-year
settlements
(see table 2).
with CO LA clauses
called for wage-rate
adjustments
8.5 percent
1973 to 1978 before the
from
itself
column
1). When the actual wage-rate
due
aged
was
to the COLAs
the
wage-rate
10.8 percent
inflation
triggered
that averaged
clause
ments
on average, employees
improved
ment
(see
table
themselves
adjustments
Employees
received
first-year
(column
inflation
rate.
The
settlements
3), about
a. Four quarters of escalation are included in data.
b. Percent change, December to December.
c. Preliminary figures.
non-COLA-related
product
tage
over
clause
is
between
year with relatively
COLA
and
in the labor and
percentage
adjustments
due
1975. The
clauses
affected
unions
in their
wage
increases.
an
abilities
Since
a COLA
inflation-insurance
pol icy, it might best be thought
Unions
bargaining
to
of as a form
situations
can
procure
numbers
the
year
wage
under
or earlier.
period,
these recovery
be larger
percent
in 1973 to 73 percent
in a
apparent
the
COLA
rates
rate is not much
two
similar inflationary
in
clauses,
an
contracts
Since
years,
"recovered"
or COLAs,
average
of
50 percent
6.7
were
A
aver-
COLAs
tion
common
centers
protection
information
misunderstanding
around
that
the degree
they
offer.
in table 2, it is evident
about
Price
1979, the
of
the
5. These characteristics
include the type of CO LA
formula,
the timing of the wage-rate adjustments, and possible "caps" (limits) on -the size
of COLA increases permitted.
of inflaFrom
the
that in a
in 1976 (see
and
recovery
1. The current
greater
than
period,
rates
6. The Consumer Price Index for Urban Wage and
Clerical Workers is used in computing
recovery
rates.
the rate in a
namely
1974.
COLA,
%
CPI,
%
Recovery.
%
1972
1973
1974
1975
1976
1977
1978
1979a
2.0
4.1
5.8
4.8
3.5
3.9
5.0
6.7
3.4
8.8
12.2
7.0
4.8
6.8
9.0
13.4
58.8
46.6
47.5
68.6
72.9
57.4
55.6
50.0
a.
data.
Preliminary
SOURCE:
is
recovery
COLA, Inflation,
and Recovery Rates
Year
in that
Consumer
during
1972-1979
the
rates ranged from 47
inflation
negotiated
the
inflation
from chart
employees
of
During
1 and table 3). The inverse relationship
of
better fringe benefits.
COLA Limitations
chart
Table 3
Index rose by 13.4 percent
COLAs
wage-rate
between
in these
rate.6
inflation
rate, such as in
discrepancy
In 1979 escalator
increased
percent
with more leverage
the
are different
protectlon.P
basically
publication).
such as in
adjustments
characteristics
and
total
CO LAs can
a higher inflation
explaining
advan-
to
of
than the CO LA percentage
enjoy
a continuing
low inflation,
1976, the
It is more likely, however,
other
of fringe benefit.
in their
8.2
averaging
wage increases may be due
markets.
some unions
negotiate
COLAs
the same as the
circumstances
that
Current WageDevelopments (monthly
Bureau of Labor Statistics,
year with
discrepancy
to temporary
without
2,
adjust-
2). The average
rate for the period was 8.1 percent;
(column
year.
8.8
12.2
7.0
4.8
6.8
9.0
with COLA protection
their real wages in the first settle-
percent
argue that only the timing of
and without
"catch-up"
both
equal
of a COLA clause in a negotiated
agreement
those
enjoyed
5.8
10.2
9.1
8.3
7.6
8.0
9.9
12.2
12.8
10.8
9.7
9.4
8.0
6.9
Consumer
Price Index b
First-Year
Settlement
without Escalator
Settlement
plus
Realized COLA a
5.7
9.5
12.2
8.4
1973
1974
1975
1976
1977
1978c
SOURCE:
If all unions
changes
Settlements
During 1979, 8.9 million workers in major bargaining units actually received wage increases averaging
9.2 percent. Wage adjustments
were due to current settlements,
deferred increases paid from previously
negotiated contracts, or COLA increases. When prorated over the 9.3 million employees under major
agreements, the average wage increase put into effect was 8.8 percent.
combined,
4.
1973
Year
Escalator provision
as a percent of total
the
COLA clauses are often considered
a
1972
units
1977 period, COLAs contributed
2.5 percent of the effective change. Most
recently, COLAs provided about 30 percent
of the 1978 adjustments
and 34 percent of
those in 1979 (see table 1).
(excluding
per year.2
of wage-rate
workers
in negotiated
10 percent
about
rate
component
for union
adjustment
Due to:
Current settlement
Prior settlement
Escalator provision
Inflation has played a major role during the past few years in determining the substance and
form of collective bargaining agreements. This Economic Commentary
examines the inituences of inflation on negotiated settlements, with special emphasis on cost-of-living adjustment clauses.
Wage-rate
Table 2 Comparison of Average First-Year Wage-Rate Settlements
before and after Escalator Adjustments
Table 1 Average Percent Change in Effective Wage-Rate Adjustments
Inflation and Cost-of-Living
Adjustment Clauses
Bureau of Labor Statistics.
Total effective
By Mark S. Sniderman
increases
among
ployees have generally
unionized
em-
been larger in the past
An important
increases
few years than increases among nonunionized
due
employees.
clauses
As measured
by the Employment
Cost Index, for example,
workers
wage rates of union
40.1
increased
percent
between
nonunion
1975 and December 1979, while
wage rates rose 34.9 percent.l
Effective
wage-rate
September
collective
bargaining
percent
period,
the
adjustments
per
year
whereas
private
units
during
average
nonfarm
major
8.1
1972-1979
averaged
the
hourly
economy
overti me in manufacturing)
in
earnings
in
to
rose 7.6 percent
Mark S. Sruderrnan is Economic Advisor, Federal
Reserve Bank of Cleveland. The research assistance
of Michael F. Bryan is sincerely appreciated.
1. The Employment
Cost Index measures changes
in straight-time
average hourly earnings of most
private nonfarm
employees.
For more details
see BLS Handbook of Methods for Survey and
Studies, U.S. Bureau
of Labor
Statistics,
Bulletin 1910, 1976.
2. Effective adjustments
in major collective bargaining un its refer to agreements covering 1,000
or more workers. Adjustments
are due to current and prior settlements
and cost-of-living
agreements.
Average hourly
earnings
figures
refer to changes in the Hourly Earnings Index
from January to January. See BLS Handbook
of Methods for Survey and Study for information about series construction.
is the portion
cost-of-living
adjustment
(COLA)
agreements.
In 1972,
of the total effective
adjustments
resulted
in major
from
COLAs.
wage-
bargaining
1973from 19 to
During
insurance
tion,
policy
against
but benefits
inflation
insurance
tributed
throughout
Settlements
example,
usually
not
the
those
having this
union
automobile
dis-
sector.3
industry,
do not provide
in the
as an
infla-
uniformly
in the construction
typically
whereas
unanticipated
to employees
are
for
COLAs,
industry
do. In 1979, 9.3 mill ion employees
were subject
and about
to major bargaining
60 percent
a.
agreements,
had COLA clause pro-
tection.4
3. While it is possible to design a contract mechanism that lowers wage rates when the price level
declines, few-if
any-COLA
clauses in operation are so designed.
1974
1975
1976
1977
1978
1979
6.6
7.0
9.4
8.7
8.1
8.0
8.2
8.8
Percent
SOURCE:
1.7
4.2
0.7
3.0
2.6
1.3
10.6
18.6
4.8
2.6
1.9
3.2
3.2
1.6
2.8
3.7
2.2
20.2
25.3
3.0
3.2
1.7
2.0
3.7
2.4
In 1979, about 72 million people were employed
in the private
nonfarm
sector of the U.S.
economy.
With Escalator
21.3
19.8
First-Year
Settlement
2.8
3.0
3.0
29.3
34.1
Bureau of Labor Statistics.
power
and
market
conditions,
inclusion
their
employers
bargaining
faced
some analysts
should
of the
employees
analysts
would
wage increases
ees with
be irrelevant
in the
similar
argue, the
would
without
long run.
differ
These
insurance,
would
get
as
large
in the first year of their
Comparing
employee
among employ-
COLA
COLAs
increases
new contracts.
to the wages
groups,
the experience
however,
of
indicates
that those groups with COLAs fare better, on
average, in every year examined
First-year
settlements
(see table 2).
with CO LA clauses
called for wage-rate
adjustments
8.5 percent
1973 to 1978 before the
from
itself
column
1). When the actual wage-rate
due
aged
was
to the COLAs
the
wage-rate
10.8 percent
inflation
triggered
that averaged
clause
ments
on average, employees
improved
ment
(see
table
themselves
adjustments
Employees
received
first-year
(column
inflation
rate.
The
settlements
3), about
a. Four quarters of escalation are included in data.
b. Percent change, December to December.
c. Preliminary figures.
non-COLA-related
product
tage
over
clause
is
between
year with relatively
COLA
and
in the labor and
percentage
adjustments
due
1975. The
clauses
affected
unions
in their
wage
increases.
an
abilities
Since
a COLA
inflation-insurance
pol icy, it might best be thought
Unions
bargaining
to
of as a form
situations
can
procure
numbers
the
year
wage
under
or earlier.
period,
these recovery
be larger
percent
in 1973 to 73 percent
in a
apparent
the
COLA
rates
rate is not much
two
similar inflationary
in
clauses,
an
contracts
Since
years,
"recovered"
or COLAs,
average
of
50 percent
6.7
were
A
aver-
COLAs
tion
common
centers
protection
information
misunderstanding
around
that
the degree
they
offer.
in table 2, it is evident
about
Price
1979, the
of
the
5. These characteristics
include the type of CO LA
formula,
the timing of the wage-rate adjustments, and possible "caps" (limits) on -the size
of COLA increases permitted.
of inflaFrom
the
that in a
in 1976 (see
and
recovery
1. The current
greater
than
period,
rates
6. The Consumer Price Index for Urban Wage and
Clerical Workers is used in computing
recovery
rates.
the rate in a
namely
1974.
COLA,
%
CPI,
%
Recovery.
%
1972
1973
1974
1975
1976
1977
1978
1979a
2.0
4.1
5.8
4.8
3.5
3.9
5.0
6.7
3.4
8.8
12.2
7.0
4.8
6.8
9.0
13.4
58.8
46.6
47.5
68.6
72.9
57.4
55.6
50.0
a.
data.
Preliminary
SOURCE:
is
recovery
COLA, Inflation,
and Recovery Rates
Year
in that
Consumer
during
1972-1979
the
rates ranged from 47
inflation
negotiated
the
inflation
from chart
employees
of
During
1 and table 3). The inverse relationship
of
better fringe benefits.
COLA Limitations
chart
Table 3
Index rose by 13.4 percent
COLAs
wage-rate
between
in these
rate.6
inflation
rate, such as in
discrepancy
In 1979 escalator
increased
percent
with more leverage
the
are different
protectlon.P
basically
publication).
such as in
adjustments
characteristics
and
total
CO LAs can
a higher inflation
explaining
advan-
to
of
than the CO LA percentage
enjoy
a continuing
low inflation,
1976, the
It is more likely, however,
other
of fringe benefit.
in their
8.2
averaging
wage increases may be due
markets.
some unions
negotiate
COLAs
the same as the
circumstances
that
Current WageDevelopments (monthly
Bureau of Labor Statistics,
year with
discrepancy
to temporary
without
2,
adjust-
2). The average
rate for the period was 8.1 percent;
(column
year.
8.8
12.2
7.0
4.8
6.8
9.0
with COLA protection
their real wages in the first settle-
percent
argue that only the timing of
and without
"catch-up"
both
equal
of a COLA clause in a negotiated
agreement
those
enjoyed
5.8
10.2
9.1
8.3
7.6
8.0
9.9
12.2
12.8
10.8
9.7
9.4
8.0
6.9
Consumer
Price Index b
First-Year
Settlement
without Escalator
Settlement
plus
Realized COLA a
5.7
9.5
12.2
8.4
1973
1974
1975
1976
1977
1978c
SOURCE:
If all unions
changes
Settlements
During 1979, 8.9 million workers in major bargaining units actually received wage increases averaging
9.2 percent. Wage adjustments
were due to current settlements,
deferred increases paid from previously
negotiated contracts, or COLA increases. When prorated over the 9.3 million employees under major
agreements, the average wage increase put into effect was 8.8 percent.
combined,
4.
1973
Year
Escalator provision
as a percent of total
the
COLA clauses are often considered
a
1972
units
1977 period, COLAs contributed
2.5 percent of the effective change. Most
recently, COLAs provided about 30 percent
of the 1978 adjustments
and 34 percent of
those in 1979 (see table 1).
(excluding
per year.2
of wage-rate
workers
in negotiated
10 percent
about
rate
component
for union
adjustment
Due to:
Current settlement
Prior settlement
Escalator provision
Inflation has played a major role during the past few years in determining the substance and
form of collective bargaining agreements. This Economic Commentary
examines the inituences of inflation on negotiated settlements, with special emphasis on cost-of-living adjustment clauses.
Wage-rate
Table 2 Comparison of Average First-Year Wage-Rate Settlements
before and after Escalator Adjustments
Table 1 Average Percent Change in Effective Wage-Rate Adjustments
Inflation and Cost-of-Living
Adjustment Clauses
Bureau of Labor Statistics.
Total effective
By Mark S. Sniderman
increases
among
ployees have generally
unionized
em-
been larger in the past
An important
increases
few years than increases among nonunionized
due
employees.
clauses
As measured
by the Employment
Cost Index, for example,
workers
wage rates of union
40.1
increased
percent
between
nonunion
1975 and December 1979, while
wage rates rose 34.9 percent.l
Effective
wage-rate
September
collective
bargaining
percent
period,
the
adjustments
per
year
whereas
private
units
during
average
nonfarm
major
8.1
1972-1979
averaged
the
hourly
economy
overti me in manufacturing)
in
earnings
in
to
rose 7.6 percent
Mark S. Sruderrnan is Economic Advisor, Federal
Reserve Bank of Cleveland. The research assistance
of Michael F. Bryan is sincerely appreciated.
1. The Employment
Cost Index measures changes
in straight-time
average hourly earnings of most
private nonfarm
employees.
For more details
see BLS Handbook of Methods for Survey and
Studies, U.S. Bureau
of Labor
Statistics,
Bulletin 1910, 1976.
2. Effective adjustments
in major collective bargaining un its refer to agreements covering 1,000
or more workers. Adjustments
are due to current and prior settlements
and cost-of-living
agreements.
Average hourly
earnings
figures
refer to changes in the Hourly Earnings Index
from January to January. See BLS Handbook
of Methods for Survey and Study for information about series construction.
is the portion
cost-of-living
adjustment
(COLA)
agreements.
In 1972,
of the total effective
adjustments
resulted
in major
from
COLAs.
wage-
bargaining
1973from 19 to
During
insurance
tion,
policy
against
but benefits
inflation
insurance
tributed
throughout
Settlements
example,
usually
not
the
those
having this
union
automobile
dis-
sector.3
industry,
do not provide
in the
as an
infla-
uniformly
in the construction
typically
whereas
unanticipated
to employees
are
for
COLAs,
industry
do. In 1979, 9.3 mill ion employees
were subject
and about
to major bargaining
60 percent
a.
agreements,
had COLA clause pro-
tection.4
3. While it is possible to design a contract mechanism that lowers wage rates when the price level
declines, few-if
any-COLA
clauses in operation are so designed.
1974
1975
1976
1977
1978
1979
6.6
7.0
9.4
8.7
8.1
8.0
8.2
8.8
Percent
SOURCE:
1.7
4.2
0.7
3.0
2.6
1.3
10.6
18.6
4.8
2.6
1.9
3.2
3.2
1.6
2.8
3.7
2.2
20.2
25.3
3.0
3.2
1.7
2.0
3.7
2.4
In 1979, about 72 million people were employed
in the private
nonfarm
sector of the U.S.
economy.
With Escalator
21.3
19.8
First-Year
Settlement
2.8
3.0
3.0
29.3
34.1
Bureau of Labor Statistics.
power
and
market
conditions,
inclusion
their
employers
bargaining
faced
some analysts
should
of the
employees
analysts
would
wage increases
ees with
be irrelevant
in the
similar
argue, the
would
without
long run.
differ
These
insurance,
would
get
as
large
in the first year of their
Comparing
employee
among employ-
COLA
COLAs
increases
new contracts.
to the wages
groups,
the experience
however,
of
indicates
that those groups with COLAs fare better, on
average, in every year examined
First-year
settlements
(see table 2).
with CO LA clauses
called for wage-rate
adjustments
8.5 percent
1973 to 1978 before the
from
itself
column
1). When the actual wage-rate
due
aged
was
to the COLAs
the
wage-rate
10.8 percent
inflation
triggered
that averaged
clause
ments
on average, employees
improved
ment
(see
table
themselves
adjustments
Employees
received
first-year
(column
inflation
rate.
The
settlements
3), about
a. Four quarters of escalation are included in data.
b. Percent change, December to December.
c. Preliminary figures.
non-COLA-related
product
tage
over
clause
is
between
year with relatively
COLA
and
in the labor and
percentage
adjustments
due
1975. The
clauses
affected
unions
in their
wage
increases.
an
abilities
Since
a COLA
inflation-insurance
pol icy, it might best be thought
Unions
bargaining
to
of as a form
situations
can
procure
numbers
the
year
wage
under
or earlier.
period,
these recovery
be larger
percent
in 1973 to 73 percent
in a
apparent
the
COLA
rates
rate is not much
two
similar inflationary
in
clauses,
an
contracts
Since
years,
"recovered"
or COLAs,
average
of
50 percent
6.7
were
A
aver-
COLAs
tion
common
centers
protection
information
misunderstanding
around
that
the degree
they
offer.
in table 2, it is evident
about
Price
1979, the
of
the
5. These characteristics
include the type of CO LA
formula,
the timing of the wage-rate adjustments, and possible "caps" (limits) on -the size
of COLA increases permitted.
of inflaFrom
the
that in a
in 1976 (see
and
recovery
1. The current
greater
than
period,
rates
6. The Consumer Price Index for Urban Wage and
Clerical Workers is used in computing
recovery
rates.
the rate in a
namely
1974.
COLA,
%
CPI,
%
Recovery.
%
1972
1973
1974
1975
1976
1977
1978
1979a
2.0
4.1
5.8
4.8
3.5
3.9
5.0
6.7
3.4
8.8
12.2
7.0
4.8
6.8
9.0
13.4
58.8
46.6
47.5
68.6
72.9
57.4
55.6
50.0
a.
data.
Preliminary
SOURCE:
is
recovery
COLA, Inflation,
and Recovery Rates
Year
in that
Consumer
during
1972-1979
the
rates ranged from 47
inflation
negotiated
the
inflation
from chart
employees
of
During
1 and table 3). The inverse relationship
of
better fringe benefits.
COLA Limitations
chart
Table 3
Index rose by 13.4 percent
COLAs
wage-rate
between
in these
rate.6
inflation
rate, such as in
discrepancy
In 1979 escalator
increased
percent
with more leverage
the
are different
protectlon.P
basically
publication).
such as in
adjustments
characteristics
and
total
CO LAs can
a higher inflation
explaining
advan-
to
of
than the CO LA percentage
enjoy
a continuing
low inflation,
1976, the
It is more likely, however,
other
of fringe benefit.
in their
8.2
averaging
wage increases may be due
markets.
some unions
negotiate
COLAs
the same as the
circumstances
that
Current WageDevelopments (monthly
Bureau of Labor Statistics,
year with
discrepancy
to temporary
without
2,
adjust-
2). The average
rate for the period was 8.1 percent;
(column
year.
8.8
12.2
7.0
4.8
6.8
9.0
with COLA protection
their real wages in the first settle-
percent
argue that only the timing of
and without
"catch-up"
both
equal
of a COLA clause in a negotiated
agreement
those
enjoyed
5.8
10.2
9.1
8.3
7.6
8.0
9.9
12.2
12.8
10.8
9.7
9.4
8.0
6.9
Consumer
Price Index b
First-Year
Settlement
without Escalator
Settlement
plus
Realized COLA a
5.7
9.5
12.2
8.4
1973
1974
1975
1976
1977
1978c
SOURCE:
If all unions
changes
Settlements
During 1979, 8.9 million workers in major bargaining units actually received wage increases averaging
9.2 percent. Wage adjustments
were due to current settlements,
deferred increases paid from previously
negotiated contracts, or COLA increases. When prorated over the 9.3 million employees under major
agreements, the average wage increase put into effect was 8.8 percent.
combined,
4.
1973
Year
Escalator provision
as a percent of total
the
COLA clauses are often considered
a
1972
units
1977 period, COLAs contributed
2.5 percent of the effective change. Most
recently, COLAs provided about 30 percent
of the 1978 adjustments
and 34 percent of
those in 1979 (see table 1).
(excluding
per year.2
of wage-rate
workers
in negotiated
10 percent
about
rate
component
for union
adjustment
Due to:
Current settlement
Prior settlement
Escalator provision
Inflation has played a major role during the past few years in determining the substance and
form of collective bargaining agreements. This Economic Commentary
examines the inituences of inflation on negotiated settlements, with special emphasis on cost-of-living adjustment clauses.
Wage-rate
Table 2 Comparison of Average First-Year Wage-Rate Settlements
before and after Escalator Adjustments
Table 1 Average Percent Change in Effective Wage-Rate Adjustments
Inflation and Cost-of-Living
Adjustment Clauses
Bureau of Labor Statistics.
March 24, 1980
Chart 1
rate of $5.45
Rates of Inflation, Recovery, and Cost-of-Living
Adjustment: 1972-1979
would
boost
each
Percent
Percent
would
0.2
wages
United
Automobile
Rubber
Workers
clauses than
Reco very Rates
one
a formula
cent
change.7
point
important
require
per hour
During
Workers
negotiated
"richer"
unions
in the next
unions
COLA
of the President's
wage-rate
inflation
This
year
the
The
pay
guidelines
45
1976
Inflation and the Current
Bargaining Climate
With
rates
inflation
low,
many
their
rates
it should
unions
COLA
COLA formula
of one
cent
change
in the
are
interested
clauses.
The
most
per hour
price
for each
index.
0.3
the price
be impossible
rose
were $5.00 per hour and
index
were equal
9 percent,
bringing
or to $5.45
pace. The COLA formula
a
to prevent
that the base
to 100. If
the
to 109, the wage rate would
rise 9 percent,
point
such
it may
in real wages. Suppose
index
increase
Under
formula
prices
common
1979
erosions
that
that
in improving
calls for a wage-rate
1978
wage in an industry
high and recovery
not be surprising
1977
a wage rate of $5.30,
price
have to
per hour, to keep
would only provide
however;
to attain
a
issue,
This
retired
point
is 7.5 percent.
1970s
have encouraged
use of COLA
ceived
somewhat
who
of
pension
unions
have pressed
of the
to be diverted
During
1980
older
for price
indexing
Workers
increase
industries.
Some
but to no avail. Recently,
Automobile
for part
is pensions.
the purchasing
benefits.
and
regular
the
to bargaining
than
COLA
into pension
1981,
The
settlement
large
of
the
prowage
benefits.
pension
issue
in the steel and
steelworkers
employees
are relain
terms.
ensures
ments.
this
that
in the
8. For more discussion on this point, see Mark S.
Sniderman and Roseanne K. Pajka, "Collective
Bargaining and Wage Standards in 1979,"
Economic Commentary, Federal Reserve Bank
of Cleveland, March 12,1979.
importance
Despite
wage
necessarily
greater
guarantee
than
be over-
group
smaller
larger
without
COLAs
receive
members.
clauses themselves
increases
do
wage hikes.
employees
than union
escalator
wage
may
without
receive
greater
do
than
the rate of inflation.
While unions
inflation,
it would
have learned
to cope with
be difficult
to argue that
they have benefited
has
probably
more
always
face
from it. In fact, inflation
made
troublesome
contract
for
pressures
union
to
Inflation and Cost-of-Living
Adjustment Clauses
that the group of
the
wage increases
re-
In this issue:
clauses,
experiences
many nonunion
Furthermore,
not
COLAs
than
those
wage increases
all employees
Likewise,
that
protection
of COLAs
with
settle-
have escalator
the finding
increases
COLAs,
not
not
widespread
suggests
COLA
better
did
in the
in negotiated
evidence
enjoying
employees
other
7. If the base wage were $10.00 per hour instead
of $5.00, a "one-cent-for-O.3" formula yields
$10.30, or 3 percent; a "one-cent-tor-OiZ"
formula yields $10.45, or 4.5 percent; a "onecent-for-O.'!"
formula yields $10.90, or the
desired 9 percent. This example illustrates why
formulas must be changed to keep real wage
gains from eroding.
While
stated.
a more
clauses
those
power
have
contract
high rates of inflation
infla-
strategy
members
on
Conclusion
employees
has eroded
where
<,ECONOMIC
B'COIt'lMENTARY
1981 coal negotiations.
than
certainly
real
is also a
will be important
Persistently
6 percent.
area in which
union,
arrangement
benefits
the
important.
industry
union
of
to be
industry,
remains
influence
institutional
pension
years
of
due to COLAs
reached
steel
benefits
Mine Workers
larger
bargaining
tively
major
17
continues
in the coal
encourage
tion affects
coal
United
security
expenditures
might be the case.8
will be critical
o
their
the guidelines
also
important
vided
also encour-
benefit
Another
United
50
rate
trigger
these benefits,
5
In the
job
about
security
in the
value of pension
as part of the settlement
health-insurance
55
Coun-
improve
adjustments
the
Inflation
and
Under
after
otherwise
10
adopt
were not counted
60
15
to
protection.
1979,
65
1975
be
few
averaging
As job
considerable
The guidelines
age
1974
threatened
COLA
in the past. This issue should
to other
for
the
and the United
cil on Wage and Price Stability
1973
1979
industries,
seniority.
years.
70
1972
that
negotiations
leaders,
deliver
both
who
im-
proved wages and pensions.
The views stated herein are those of
the author and not necessarily those of the
Federal Reserve Bank of Cleveland or of the
Federal Reserve System.
Research Department
Federal Reserve Bank of Cleveland
Post Office Box 6387
Cleveland, Ohio 44101
BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385
March 24, 1980
Chart 1
rate of $5.45
Rates of Inflation, Recovery, and Cost-of-Living
Adjustment: 1972-1979
would
boost
each
Percent
Percent
would
0.2
wages
United
Automobile
Rubber
Workers
clauses than
Reco very Rates
one
a formula
cent
change.7
point
important
require
per hour
During
Workers
negotiated
"richer"
unions
in the next
unions
COLA
of the President's
wage-rate
inflation
This
year
the
The
pay
guidelines
45
1976
Inflation and the Current
Bargaining Climate
With
rates
inflation
low,
many
their
rates
it should
unions
COLA
COLA formula
of one
cent
change
in the
are
interested
clauses.
The
most
per hour
price
for each
index.
0.3
the price
be impossible
rose
were $5.00 per hour and
index
were equal
9 percent,
bringing
or to $5.45
pace. The COLA formula
a
to prevent
that the base
to 100. If
the
to 109, the wage rate would
rise 9 percent,
point
such
it may
in real wages. Suppose
index
increase
Under
formula
prices
common
1979
erosions
that
that
in improving
calls for a wage-rate
1978
wage in an industry
high and recovery
not be surprising
1977
a wage rate of $5.30,
price
have to
per hour, to keep
would only provide
however;
to attain
a
issue,
This
retired
point
is 7.5 percent.
1970s
have encouraged
use of COLA
ceived
somewhat
who
of
pension
unions
have pressed
of the
to be diverted
During
1980
older
for price
indexing
Workers
increase
industries.
Some
but to no avail. Recently,
Automobile
for part
is pensions.
the purchasing
benefits.
and
regular
the
to bargaining
than
COLA
into pension
1981,
The
settlement
large
of
the
prowage
benefits.
pension
issue
in the steel and
steelworkers
employees
are relain
terms.
ensures
ments.
this
that
in the
8. For more discussion on this point, see Mark S.
Sniderman and Roseanne K. Pajka, "Collective
Bargaining and Wage Standards in 1979,"
Economic Commentary, Federal Reserve Bank
of Cleveland, March 12,1979.
importance
Despite
wage
necessarily
greater
guarantee
than
be over-
group
smaller
larger
without
COLAs
receive
members.
clauses themselves
increases
do
wage hikes.
employees
than union
escalator
wage
may
without
receive
greater
do
than
the rate of inflation.
While unions
inflation,
it would
have learned
to cope with
be difficult
to argue that
they have benefited
has
probably
more
always
face
from it. In fact, inflation
made
troublesome
contract
for
pressures
union
to
Inflation and Cost-of-Living
Adjustment Clauses
that the group of
the
wage increases
re-
In this issue:
clauses,
experiences
many nonunion
Furthermore,
not
COLAs
than
those
wage increases
all employees
Likewise,
that
protection
of COLAs
with
settle-
have escalator
the finding
increases
COLAs,
not
not
widespread
suggests
COLA
better
did
in the
in negotiated
evidence
enjoying
employees
other
7. If the base wage were $10.00 per hour instead
of $5.00, a "one-cent-for-O.3" formula yields
$10.30, or 3 percent; a "one-cent-tor-OiZ"
formula yields $10.45, or 4.5 percent; a "onecent-for-O.'!"
formula yields $10.90, or the
desired 9 percent. This example illustrates why
formulas must be changed to keep real wage
gains from eroding.
While
stated.
a more
clauses
those
power
have
contract
high rates of inflation
infla-
strategy
members
on
Conclusion
employees
has eroded
where
<,ECONOMIC
B'COIt'lMENTARY
1981 coal negotiations.
than
certainly
real
is also a
will be important
Persistently
6 percent.
area in which
union,
arrangement
benefits
the
important.
industry
union
of
to be
industry,
remains
influence
institutional
pension
years
of
due to COLAs
reached
steel
benefits
Mine Workers
larger
bargaining
tively
major
17
continues
in the coal
encourage
tion affects
coal
United
security
expenditures
might be the case.8
will be critical
o
their
the guidelines
also
important
vided
also encour-
benefit
Another
United
50
rate
trigger
these benefits,
5
In the
job
about
security
in the
value of pension
as part of the settlement
health-insurance
55
Coun-
improve
adjustments
the
Inflation
and
Under
after
otherwise
10
adopt
were not counted
60
15
to
protection.
1979,
65
1975
be
few
averaging
As job
considerable
The guidelines
age
1974
threatened
COLA
in the past. This issue should
to other
for
the
and the United
cil on Wage and Price Stability
1973
1979
industries,
seniority.
years.
70
1972
that
negotiations
leaders,
deliver
both
who
im-
proved wages and pensions.
The views stated herein are those of
the author and not necessarily those of the
Federal Reserve Bank of Cleveland or of the
Federal Reserve System.
Research Department
Federal Reserve Bank of Cleveland
Post Office Box 6387
Cleveland, Ohio 44101
BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385