Un-Cola: Why Have Cost-of-Living Clauses Disappeared from Union Contracts and Will They Return?

Abstract

1. Introduction One of the major changes in collective bargaining in recent decades has been the gradual elimination of cost-of-living adjustments (COLAs) from union contracts. In 1976, 61% of union workers covered by major collective bargaining contracts had COLA provisions, but by the end of 1995, when the U.S. Bureau of Labor Statistics stopped collecting data on collective bargaining settlements, COLA coverage had fallen to 22%.1 Although the decline in COLA rates has been studied extensively, there is no agreement as to which factors are primarily responsible for this decline. One view attributes the elimination of COLAs, or escalator clauses, to declines in inflationary uncertainty; a second view emphasizes the erosion of union power; yet another view focuses on structural shifts in the U.S. economy. Previous research has not determined the relative importance of these and other hypotheses. Another reason to reassess COLA determination is that the economy has changed since the early research was completed. The bulk of studies to examine COLA incidence statistically have relied on sample periods that end in 1982 or earlier.2 Since then, there have been major changes in union strength, inflationary uncertainty, and other potential determinants of wage indexation, including deregulation of certain industries. In addition, more than 90% of the decline in COLA rates has occurred since 1982. It is worthwhile to determine whether the factors deemed to be important in the early studies are still important. We provide a comparison with previous research, formally assess the contributions of various factors to the erosion of COLA rates, and provide insights as to likely changes in COLA coverage in the future. If inflation picks up, and with it inflationary uncertainty,3 will COLA rates rise to levels not seen since the 1970s? What would be the consequences of a rebound in union power, of further economic deregulation, of likely industrial and demographic shifts in the economy? Once the major causes of past changes in COLA coverage are understood, it becomes possible to project the consequences of changes in key economic variables. Given the concern in macroeconomics with wage indexation and the linkage between wages and prices (Gray 1976; Fischer 1986; Ball and Cecchetti 1991; Schiller 1997), the extent to which COLA coverage responds to economic factors has important implications for the economy. Underlying the empirical analysis is a pooled cross-sectional, time-series model of COLA incidence that accounts for industry fixed effects. To estimate the model, we assemble a panel data set of COLA coverage and an array of characteristics for 32 private-sector industries over a 22-year period. Because COLA clauses are multiyear in nature, the model also recognizes that the percentage of workers covered by COLA clauses in a particular year depends on conditions in both the current year and previous years. Previewing results, we find that the major cause of the decline in COLA coverage has been the reduction in inflationary uncertainty. Second in importance has been the erosion of union power. Both the percentage of the industry's workforce that is unionized and the estimated union wage premium in the industry are highly significant determinants of COLA coverage. But because the union wage premium has remained largely intact in most industries, changes in the premium are much less important than losses in unionization in explaining the overall decline in COLA provisions. Economic deregulation, industrial shifts, and an increased presence of women in the workforce have had modest effects on COLA rates. On the basis of our findings, a rebound in inflationary uncertainty to the levels experienced in the 1970s would raise COLA coverage by 10 percentage points. 2. Background For workers in long-term contracts, COLAs provide at least partial protection from the consequences of unexpected inflation. …