Cost Of Living Adjustments Research Articles

Is the United States CPI Biased Across Income and Age Groups?

The recent Boskin Commission Report (1996) underscores a significant upward bias in CPI measurement in the United States. This may result in excessive cost-of-living adjustment (COLA) of some entitlements in the federal budget because COLA is indexed to CPI. This paper presents some evidence that overall CPI may be biased against lower income elderly households, the primary beneficiaries of COLA. Although a downward adjustment in CPI resulting in an across-the-board cut in COLA of entitlements may yield significant budgetary savings, it may result in a deterioration in income distribution against lower income elderly households.

The political market for real income redistribution through choice of the weights in COLAs

This paper studies alternative cost-of-living indexes derived from the generalized Fechner-Thurstone (GFT) utility form, their use in contracts for cost-of-living adjustments (COLAs), and the resulting effect of choice of index on the distribution of real income. The indexes and their distributional effects are compared to the officially reported Consumer Price Index (CPI) and a CPI computed from the same data set used to compute the GFT indexes. It is found that the choice of index used in adjustment clauses in contracts has an impact on the distribution of real income of the group. As an example, the U.S. federal government schedule of wages and salaries is adjusted from 1981 through 1984 by all of the indexes reported here. Use of alternative indexes illuminates the normative assumptions regarding the relative importance of different income strata (among other things) implicit in any public practice of pegging COLAs to a single form of price index.

Automatic cost-of-living adjustments and the structural federal budget deficit

The mounting budget deficit is both economically and politically in supportable Projections of the unified federal budget deficit and the structural unified federal budget deficit and the structural deficit and the structural deficit converge in the next few years, indicating that nearly all of the deficit is the result of policy choices. Efforts to significantly reduce the deficit must focus on the largest componenet of federal spending, entitlements such as social security, federal retirements, and medicare. Entitlements account for 45 percent of federal spending. About two-thirds of the growth in these programs arises from automatic cost of living adjustments (COLAs). Each one percent COLA increase adds $23 billion to the deficit over the next two decades. It is debated whether COLA restraint should be included in deficit reduction efforts. Advocatesargue that COLAs are a major cause of deficits , tha trestraint is fair after a decade in which benefits grewfaster than in flation and wages, and that restraint improves the solvency of major programs. COLA restraint also reduces the deficit quickly, spread s the burden of deficit reduction over a very large group, and allows nominal benefits to remain at current levels, or even to grow, albeit more slowly. Opponents of restraint argue that COLAs are a fundamental program feature, that COLAs are needed to maintain beneficiaries purchasing power, and that recipients would experience economic hardship if COLAS were reduced. Common approaches to restrain COLAs emphasize either short-term budget savings or long-term program reform. Past successful efforts to restrain COLAs have been related to ensuring program solvency or ensuring equal treatment of individuals in different programs.Proposals to slow COLA growth to achieve budgetary savings haven ot been successful. Three types of COLA options seem viable under current economic and political conditions: A one-year COLA freeze, a cap on the COLA at two-thirds the rate of inflation, and a cap on the COLA at two percentage points less than the rate of inflation. The one-year COLA freeze reduces the deficit most quickly, but produces less savings in the long-run than the other options. A major attraction of formula reductions in the COLA is that the concept may be extended to other areas of the federal budget and greatly reduce the federal deficit. A plan to limit growth to two percentage points less than in flation on COLAs, other entitlements,national defense, discretionary domestic programs, and income tax indexing would reduce the deficit by one-half by 1990. An overall budget reduction plan based on CCLA restraint may be the only approach left for policy-makers who have exhausted other approaches to reducing the deficit.

Inflation and Indexation: An Empirical Approach

Previous studies have examined various aspects of indexation. We can distinguish two major points of interest: wage determination, and the effects of indexation on macroeconomic fluctuations. Some scholars have attempted to determine empirically and theoretically the causes of cost-of-living adjustment (COLA) clauses in wage contracts [3;7; 11]. The focus in this research is often on major union contracts, with wage change a function of both real factors (e.g., the unemployment rate) and monetary factors (e.g., past inflation). Typical results are that past inflation will increase the adoption of indexation, while industry-specific shocks may cause resistance to indexation. In addition, Kaufman and Woglom [7] have shown that current labor market conditions have a significant impact on long-term contracts. Research has also been concerned with the effect of wage indexation on the macroeconomy [1;2;5;6]. How can wage indexation schemes be designed so as to alleviate the substantial income redistribution due to inflation and the use of contracts in nominal

Wage Concessions and Long-Term Union Wage Flexibility

BY MANY INDICATIONS , the behavior of average union wages in the early 1980s contrasts sharply with their behavior over most of the postwar period. During the 1970s the basic mechanisms of union wage determination were in many ways solidified: the average duration of labor agreements continued to increase as the reach of multiyear contracts was extended, and there was a substantial expansion in the number of formal cost-of-living adjustment (COLA) provisions; many large unions adhered to a policy of negotiating an annual improvement factor plus COLA despite the fact that the productivity trends that formed the original justification for the annual improvement factor had greatly deteriorated; and while there has always been considerable dispersion in the results of individual negotiations, wage dispersion within the union sector appeared to increase as labor agreements that included COLA clauses ultimately yielded higher pay increases than those that did not. In addition, average union wage increases consistently exceeded average nonunion wage increases during the 1970s, raising the union-nonunion wage differential to a historic high by the early 1980s. All was not well within the union sector, however. The power of labor unions rests on their ability to sustain barriers to entry. Over the years different unions have sought to restrict nonunion competition in various ways, such as rationing access to training for some skills through apprenticeship programs, organizing all the producers of a particular

Cost-of-Living Adjustment Clauses in Union Contracts: A Summary of Results

Our paper provides an explanation why cost-of-living adjustment (COLA) provisions and their characteristics vary widely across U.S. industries. We develop models of optimal risk sharing between a firm and union to investigate the determinants of a number of contract characteristics. These include the presence and degree of wage indexing, the magnitude of deferred noncontingent wage increases, contract duration, and the trade-off between temporary layoffs and wage indexing. Preliminary empirical tests of some of the implications of the model are described. One key finding is that the level of unemployment insurance benefits appears to influence the level of layoffs and the extent of COLA coverage simultaneously.

Cost-of-Living Clauses in Union Contracts: Determinants and Effects

This study investigates, for the period 1969–81, the determinants of the incidence and strength of cost-of-living adjustment (COLA) clauses in U.S. manufacturing and the effect of those clauses on wage inflation. The sample includes approximately 5,570 union contracts in over 2,600 bargaining relationships. The authors find that both union bargaining power and inflation uncertainty positively affected the probability that a COLA clause was adopted as well as the strength of the clause adopted. Negatively influencing the incidence and strength of COLA clauses during the period studied were unanticipated changes in an industry's prices. The authors also find evidence that wage inflation was greater under contracts with uncapped COLAs than under all other contracts, a result that also was positively influenced by the amount of unanticipated inflation. From these results, the authors suggest a number of possible trends in the use and effects of COLA clauses.

Inflation–Should We Take Another Look?

Summary:Society has received only modest help from economists on inflation. Besides other effects, inflation redistributes income and wealth in ways not understood or predicted; it increases uncertainties for households, firms, and governments; and it calls into question individuals' expectations of their rightful share of goods and services, i.e., their “entitlement.” Our audiences need less mechanical, more complete and sophisticated explanations of what inflation is and what causes it; information on income, wealth, and equity effects of inflation among and between farmers, agri-industry firms, consumers, investors, savers, local and state government; and information on the consequences of alternative policies to deal with it. Agricultural economists must read and think about both emerging microeconomic and macroeconomic literature.The new inflation of the seventies is mainly chronic, compared to cyclic. Chronic recession has accompanied chronic inflation. That implies the need for novel remedies that include structural changes as well as new monetary measures. The priority needs are outside agriculture, but dominate the interaction of inflation, agriculture, and rural development. Accordingly, agricultural economists cannot accept inflation as a given situation best understood and resolved by others.The recent shifting of the primary monetary emphasis from ‘one eye on interest and one on the money supply’ to “one eye on reserves and one on the money supply” will not be adequate to control inflation. Long-run warfare to reduce inflation requires a comprehensive approach integrating monetary and fiscal measures, structural considerations, sharing of costs, and other public policy changes. Assets and income inflation create a spurious sense of well-being which has severe redistribution effects. Planning and acting on these inflated values further fans inflation. Some structural problems reinforce inflation, for example, the COLA (cost-of-living adjustment). Partial indexing creates widespread inequities, for example, social security recipients obtained a 14.3 percent raise on July 1, 1980 but the average wage earner's deductions increased in 1980 while his wage rate increased a mere 8 percent! Public policy implications include a needed statute to indicate the nation's will, desire, and procedures for containing inflation; automatic price and wage controls when inflation exceeds certain rates; elimination of partial indexing; and the resolve of all public leadership to control inflation.Inflation is chronic, world-wide, unresolved. Comprehensive solutions are needed. Agricultural economists cannot expect others ot “solve” it.

Cost of Living Adjustments

Cost of Living Adjustments

A Note on Cost of Living Adjustment in Annuities

A Note on Cost of Living Adjustment in Annuities