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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 uo}Su!qse/v\ • gEjn * uo Bo jo • BpeAa|\| . oijBpi J jE M E H • E IU J O p |E 3 • EUOZUV • *#!lc3 'oaspucjj ubs Z£Z ON JLIWH3d aiv d 3DVlSOd s n 1IVW SSV13 1SMJ 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. E ))S E |V
