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

James F. Ragan, Jr. [*]

Bernt Bratsberg [+]

For more than 20 years, unions have been trading cost-of-living adjustment clauses (COLAs) for other forms of compensation. Various explanations have been offered for the erosion of COLA coverage--including reduced inflationary uncertainty, lower union power, and structural shifts in the economy--but the relative importance of these and competing hypotheses remains untested. We investigate the reasons for the decline in COLA coverage using a pooled cross-sectional, time-series model that accounts for industry fixed effects and recognizes the multiyear nature of most union contracts. After assessing the relative importance of alternative hypotheses, we conclude with a discussion of the potential for a rebound in COLA rates.

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 betw...

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