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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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File URL: http://www.nber.org/papers/w0998.pdf
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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
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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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  1. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
  2. Martin Prachowny, 1980. "Wage Indexation: Social Benefit and Private Incentives," Working Papers 368, Queen's University, Department of Economics.
  3. Medoff, James L, 1979. "Layoffs and Alternatives under Trade Unions in U.S. Manufacturing," American Economic Review, American Economic Association, vol. 69(3), pages 380-95, June.
  4. Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
  5. Bruce E. Kaufman, 1981. "Bargaining Theory, Inflation, and Cyclical Strike Activity in Manufacturing," ILR Review, Cornell University, ILR School, vol. 34(3), pages 333-355, April.
  6. Farber, Henry S, 1978. "Individual Preferences and Union Wage Determination: The Case of the United Mine Workers," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 923-42, October.
  7. Feldstein, Martin S, 1976. "Temporary Layoffs in the Theory of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 84(5), pages 937-57, October.
  8. Parks, Richard W, 1978. "Inflation and Relative Price Variability," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 79-95, February.
  9. Dertouzos, James N & Pencavel, John H, 1981. "Wage and Employment Determination under Trade Unionism: The International Typographical Union," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1162-81, December.
  10. Blanchard, Olivier Jean, 1979. "Wage Indexing Rules and the Behavior of the Economy," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 798-815, August.
  11. Eytan Sheshinski & Yoram Weiss, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Oxford University Press, vol. 44(2), pages 287-303.
  12. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
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