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U n -C o la?
Wages will go up as prices go up in
1976, in line with the cost-of-living
adjustments (COLAs) that are part
of most major labor contracts. Even
so, COLAs still represent a minor
(albeit growing) share of the total
wage package resulting from new
contract agreements. This year in
particular, the bulk of the average
increase will result from the hefty
first-year gains achieved in multi­
year bargaining agreements.
Nonetheless, COLAs remain in the
news because of the diverse ways
they have affected this year's con­
tract negotiations. The Teamsters
were largely successful last month
in their attempt to remove the cap
(ceiling) on the amounts they could
earn under such escalator adjust­
ments. New York's subway drivers
have threatened to strike over the
State Attorney General's ruling
which would freeze their COLA as
well as their basic wage. The rubber
workers have already gone on
strike to obtain a COLA whose lack
has cost them dearly in the infla­
tionary period of the last several
years; they claim that their average
$5.50 hourly wage now lags about
25 percent behind the average auto
worker's wage, after moving closely
together in most earlier periods.
The auto workers, who started the
trend a quarter-century ago, proba­
bly will concentrate on job-security
issues rather than escalator adjust­
ments in their upcoming negotia­
tions this fall, although some UAW
leaders would like to emulate the
aluminum workers by gaining C O ­
LAs for retirees as well as active
workers.
1




Down the up escalator

Actually, cost-of-living factors have
been recognized to some extent in
wage negotiations ever since the
post-World War I inflation period,
when the scientific-management
movement supported the principle
as a contribution to employee
morale. However, the principle lost
much of its popularity in the post­
war deflationary period, when em­
ployers tried to apply it in reverse,
cutting wages as prices fell. A nota­
ble example was President Roose­
velt's action in reducing Federal
workers' salaries by 15 percent in
1933, under authority granted him
by early New Deal legislation.
The inflation of World War II and
the early postwar period generated
new interest in cost-of-living ad­
justments, and this led to the path­
breaking 1948 agreement between
the United Auto Workers and Gen­
eral Motors, the first major labor
contract containing an explicit es­
calator adjustment. This agreement
provided for an "annual improve­
ment factor" in auto workers'
standard of living. To insure that the
contractual increases stated in
nominal terms would translate into
real wage gains, the contract stipu­
lated a series of regular reviews
whereby wages would be automati­
cally adjusted to changes in the
consumer price index. That princi­
ple has been maintained (with
some liberalizing adjustments) over
the past quarter-century. Under the
present auto-industry agreement,
autoworkers receive a one-cent
wage increase for each 0.3 index
point (not percentage point) rise in
(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

the CPI. The current agreement is
uncapped (open ended), since it
sets no maximum on the amount
that can be paid out under the
escalator clause.
Coverage and formulas

The importance of COLAs has
waxed and waned with the rate of
inflation. About 4.0 million workers
were covered by escalator clauses
in major bargaining agreements
during the inflationary period of
the late 1950s; the number dropped
to 1.9 million during the early 1960s,
but then accelerated in the 1970s, to
4.0 million in 1972 and 5.9 million in
1975. At one time or another, un­
ions in steel, railways and electrical
equipment dropped COLA cover­
age, but alJ resumed coverage again
during the recent inflation. Those
receiving such adjustments account
for 58 percent of all workers under
major contracts in the private non­
farm sector, and for 74 percent of all
workers under three-year contracts.
The impact of escalators reflects not
only the number of workers
covered, but also the formula used,
the frequency of adjustment, and
the amount of capping. About 2.4
million workers follow the UAW
formula—one cent for each 0.3point change in the CPI—while
another 1.2 million receive one
cent for each 0.4-point change in
the CPI, and the rest follow other
types of formulas. About half of all
covered workers receive quarterly
wage adjustments, and most of the

2



remainder follow annual adjust­
ment formulas. Meanwhile, more
than 2 million operate with capped
adjustment formulas.
For all these reasons, wage-rate
increases under COLA provisions
have lagged substantially behind
price increases. For the 1971-75 pe­
riod as a whole, escalator increases
averaged 4.0 percent annually,
compared with a 7.0-percent annu­
al rate of increase in the CPI. (For
1975 alone, escalator gains averaged
4.8 percent compared with a 7.0percent rise in the CPI.) Thus, escala­
tor payments during the first half
of the 1970s offset about 57 percent
of the increase in consumer prices,
although the proportion offset was
much higher for those following
the auto industry formula.
Impact on wages

Nonetheless, COLAs now account
for an increasing share of effective
wage increases, as can be seen from
a breakdown of the Labor Depart­
ment's series of total wage-rate ad­
justments for major bargaining
units. The series includes wage
changes resulting from current set­
tlements, from prior-year settle­
ments, and from escalator adjust­
ments, with the relative importance
of each component determined by
the average size of wage increases
and the number of affected work­
ers. In 1975, escalator adjustments
accounted for one-fourth of the
entire 8.7-percent effective wagerate increase, compared with no
more than a one-tenth share through-

out the 1968-72 period. The in­
creased number of workers receiv­
ing COLA payments explained most
of this increased share.

justments will represent only one
part of the unions' several-pronged
drive to keep wages in line with
price increases.

Last year, the 8.7-percent effective
wage change was composed of 2.8
percent from current settlements,
3.7 percent from prior settlements,
and 2.2 percent from escalator pro­
visions. This year the proportions
should be somewhat different. Be­
cause of the relatively large number
of workers (4.5 million) covered by
agreements expiring in 1976, new
settlements undoubtedly will play
the dominant role in determining
the total effective wage increase.
Heavy front-loading of long-term
contracts, with unions obtaining
large first-year gains as a means of
recouping inflation-caused reduc­
tions in real income, could bolster
the importance of this factor even
more. Another determining factor
will be the deferred raises (averag­
ing 5.4 percent) scheduled for 5.5
million workers under the terms of
prior settlements. The number of
workers receiving deferred raises is
smaller than last year, but their
influence is still significant.

Impact on inflation

Cost-of living reviews are sched­
uled for 4.7 million workers this
year—the same as in 1975. COLAs
thus may again account for a signifi­
cant part of the overall wage pack­
age, although their impact will dimin­
ish to the extent that the inflation
rate falls below last year's 7.0percent rise in the CPI. Still, it's
worth emphasizing, escalator ad­

How much influence have COLAs
had on the recent inflationary spi­
ral? Not very much, according to a
recent study by the Council on
Wage and Price Stability, which
cites some of the factors (noted
above) that tend to limit the size of
the typical adjustment. But if infla­
tion persists, union negotiators may
attempt to expand COLA coverage
and adopt escalator provisions that
move more closely in line with CPI
changes—for example, by liberaliz­
ing formulas, removing caps, and
making more frequent adjustments.
In addition, there is an important
demonstration effect, since the es­
calation principle has spread in the
past decade from heavy industry,
where productivity gains can partly
offset escalated wage increases, to
many other sectors where produc­
tivity gains are modest or complete­
ly lacking. In fact, active workers
now account for only about onetenth of all the individuals who now
benefit from cost-of-living adjust­
ments, what with the extension of
coverage to federal retirees, socialsecurity beneficiaries and foodstamp recipients. But the solution is
not to try to limit the spread of
escalator provisions, but rather to
attack the underlying causes of in­
flation.
William Burke

3




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BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks

Amount
Outstanding
4/21/76

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)—total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (less cash items)—total*
Demand deposits (adjusted)
U.S. Government deposits
Time deposits—total*
States and political subdivisions
Savings deposits
Other time deposits:}:
Large negotiable C D ’s

87,686
64,962
1,196
22,854
19,578
10,710
10,063
12,661
87,823
24,297
752
61,295
6,853
25,745
26,392
11,442

Weekly Averages
of Daily Figures

Week ended
4/21/76

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free(+)/Net borrowed (-)
Federal Funds—Seven Large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales (-)
Transactions of U.S. security dealers
Net loans (+)/Net borrowings (-)

+

Change
from
4/14/76
+
+
+
+
+
+
+
-

99
0
99

674
807
997
156
44
22
65
68
571
736
322
19
242
133
329
193

Change from
year ago
Dollar
Percent
+
+
+
+
+
+
+
+
+
+
-

Week ended
4/14/76

-

+ 2.83
- 0.46
+ 1.87
- 4.88
- 0.54
+ 8.58
+ 33.41
+ 1.56
+ 4.24
+ 4.84
+ 176.47
+ 2.70
- 8.21
+ 31.84
- 9.46
- 27.58

2,416
298
22
1,172
107
846
2,520
194
3,570
1,122
480
1,610
613
6,217
2,759
4,357

Comparable
year-ago period

1
16
17

+

40
38
2

+ 1,391

+ 1,338

+ 2,079

+

+ 1,419

+

288

659

♦Includes items not shown separately, individuals, partnerships and corporations.

Editorial comments may be addressed to the editor (William Burke) or to the author. . . .Information
on this and other publications can be obtained by calling or writing the Public Information Section,
Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184.



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