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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
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