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Cost-of-Living Adjustment Clauses in Union Contracts

  • Ronald G. Ehrenberg
  • Leif Danziger
  • Gee San

Our paper seeks to provide an explanation for why the prevalence of COLA provisions and their characteristics vary widely across U.S. industries. We develop models of optimal risk sharing between a firm and union that allows us to investigate the determinants of a number of characteristics of union contracts. These include the presence of wage indexation, the degree of wage indexation if it exists, the magnitude of deferred noncontingent (on the price level) wage increases, the duration of labor contracts and the trade-off between temporary layoffs and wage indexation. Preliminary empirical tests of some of the implications of the model are conducted using industry data on both the prevalence of COLA provisions and layoff rates, and using contract level data on the characteristics of COLA provisions and contract duration. One key finding is that the level of unemployment insurance benefits appears to simultaneously influence the level of layoffs and the extent of COLA coverage.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0998.

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Date of creation: Oct 1982
Date of revision:
Publication status: published as Ehrenberg, Ronald G., Leif Danziger and Gee San. "Cost-of-Living Adjustment Clauses in Union Contracts: A Summary of Results." Journal of Labor Economics, Vol. 1, No. 3, (July 1983), pp. 215-245.
Handle: RePEc:nbr:nberwo:0998
Note: LS
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