provisions is not known, the fact that  (CPI-U), and the remainder used a ‘Auto Workers 496,000
one-fifth of those workers with variety of specific city indexes. aattot ies Workers eyed
COLA reviews in 1995 did not COLA clauses have generally Service Workers. 89,000
receive a COLA payments because been concentrated in contracts Steelworkers 61,000
the CPI did not rise enough indicates _ with relatively large numbers of Allothers 848,000
the importance of this type of workers. In 1995, the 22 percent COLA clauses themselves have not
testriction. of the workers under major changed dramatically over the past 20
Clauses for about 91 percent of contracts with COLA’s were in 169 —_-years, however, their yields and their
workers covered by COLA’s based contracts, about 14 percent of the popularity have declined signifi-
payments on the U.S. city average 1,212 major contracts in private cantly. Only time will tell whether
CPI for Urban Wage Earners and industry. In addition, as the circumstances will change suffi-

ciently to bring about a resurgence
of this once prominent feature of
major collective bargaining con-
tracts.

Clerical Workers (CPI-W). Another
1 percent of workers were covered by
formulas that used the U.S. city
average for All Urban Consumers

following tabulation indicates, five
unions accounted for 70 percent of
the workers covered by COLA
clauses.

Table 3. Average annual changes in wage rates over the contract life In major collective bargaining settlements with and without
COLA'’s, private industry, 1971-95

(npercent)
Average specified changes in wage rates over the contract lite?
Allindustries Manufacturing Nonmanutacturing
Year ‘Settlements | Settlements | Settlements | Settlements | Settlements | Settlements
with without with without with without
COLA’s COLA COLA'’s COLA's COLA’s COLA's
7A 92 7.3 7.3 6.8 10.4
57 65 54 57 69 69
49 5.3 42 5.9 63 54
61 91 56 8.0 66 9.3
TA 83 58 89 74 8.0
57 73 52 8.0 66 70
5.0 69 46 79 55 66
53 TA 54 78 53 69
46 8.0 40 84 55 8.0
5.0 10.3 44 89 5.7 10.8
55 88 48 66 58 99
a4 66 24 58 24 69
20 37 14 3.9 26 37
18 27 4.0 33 48 26
25 28 at 16 3.6 33
17 18 9 72 24 24
15 25 4.0 24 27 27
1.8 28 18 26 17 28
28 35 35 3.0 24 37
19 40 43 37 38 4a
3.0 33 27 37 41 32
25 34 19 32 3.0 3.0
14 25 13 24 23 26
25 23 25 24 26 23
15 26 14 25 2.0 26

potential changes from COLA clauses, although guarantead COLA pay-

‘ Changes under settlements reached in the year expressed as
ments are included.

an annual rate over the life of the contract. All measures exclude

Compensation and Working Conditions December 1996 28



wage changes in settlements with
COLA’s are understandable since the
COLA clauses were expected to
generate additional wage changes
during the contract term. In fact,
when contracts were reviewed
retrospectively for the actual amount
of wage changes workers received,
including COLA payments, the
average gains under contracts with
COLA clauses generally were larger
than those under contracts without
COLA provisions. (See table 4.)

COLA payments

Generally following the fluctua-
tions in the rate of inflation, the
average wage changes generated by
COLA clauses for workers who
received such payments ranged from
a low of 1 percent in 1986, when
some clauses generated decreases in
COLA payments, to a high of 7.7
percent in 1980. (See table 5.)
From 1991 through 1995, the
average annual change was 2 percent
or less. When compared with
movements in the CPI used to calcu-
late the COLA payments, wage
changes from COLA’s have gener-
ated “rates of return” ranging from
a high of 70 percent in 1982 toa
low of 43 percent in 1987.

In any year, the average wage
change from COLA’s under all
major contracts is computed by
weighting the percent change in
wages from COLA'’s for contracts

with such changes by the number of
workers covered by the contract, and
dividing the total of the worker-
weighted changes for these contracts
by the number of workers under all
major contracts. Therefore, the
average change under all major
contracts is affected by the size of
the wage changes and the number of
workers receiving the changes.
Reflecting the modest COLA
increases and the relatively small
number of workers receiving these
payments, the annual average wage
change from COLA’s for all major
contracts (those with and those
without COLA’s) was an increase of
0.2 percent in 1993 through 1995,
matching the record low that existed
in 1986.

‘Wage changes from COLA’s are
combined with wage changes from
settlements reached in the year and
wage changes from contracts
reached in prior years to determine
the average change in wage rates
from all sources. The contribution
of these various components (current
settlement changes, deferred
changes, and COLA’s) can vary from
year to year. At their high, from
1978 to 1981, COLA’s accounted for
about 30 percent of the average wage
change. (See chart 1.) In contrast,
COLA payments contributed less
than 10 percent toward the average
wage change during the 1968-71
period, 1986, and again each year
from 1993 through 1995.

private industry, 1968-95.

Chart 1. Average changes in wage rates and the contribution of the
various components in all major collective bargaining agreements,

UZ

27 Compensation and Working Conditions December 1996

Characteristics of COLA’s In
1995

When including a COLA clause
in a contract, negotiators must
specify the components of the clause
that will affect the COLA payments,
such as the formula, whether or not
to have a cap on the payment
amount, the CPI index to use, and
the timing of reviews. At the end of
1995, the most prevalent formula,
covering 42 percent of the 1.2
million workers with COLA’s, called
for a 1-cent change in wages for
each 0,26 point change in the CPI.
About 390,000 of these workers were
covered by the contracts between the
Big Three auto manufacturers and
the United Auto Workers. The next
most prevalent formula, affecting
about 11 percent of the workers, was
1 cent for each 0.3 point change in
the CPI. A wide variety of other
formulas covered the remaining
workers. Only 1 percent of the
workers had a clause providing a 1
percent wage change for each 1-
percent change in the CPI.

Sixty percent of the workers with
COLA’s were under clauses with
quarterly reviews, 25 percent had
annual reviews, and approximately
10 percent had semiannual reviews.
The remaining 6 percent had either
monthly reviews or some other
review period.

About 17 percent of the workers
had caps that limited the payout
amount, while only 4 percent had
minimum payments guaranteed.
Another 1 percent were covered by
clauses that specified both a mini-
mum and maximum COLA pay-
ment. The remaining 79 percent of
workers with COLA clauses did not
have such provisions. However,
many workers, including some with
caps, were covered by clauses that
provided payments only after the
CPI increased by a specified or
trigger amount. In some cases, this
amount matched the deferred wage
change, but in many cases it re-
flected an unexpectedly large
increase in prices.’ While the
number of workers with such



‘Table 4. Average annual changes in wage rates under prior contacts for major private Industry collective bargaining contracts

replaced in 1986-95
{in percent)
Average annual changes in wage rates under prior contracts!
Allcontracts. Contracts with COLA clauses Contracts without
Specified | COLA Total Specified | COLA Total ‘Speetfied (total)
changes changes changes. changes | changes changes changes
32 09 40 27 1.6 42 37
20 7 28 15 14 28 24
26 4 3.0 22 12 34 28
24 2 26 18 10 28 26
20 12 32 12 3.0 41 26
27 5 32 24 1.0 34 3.0
34 3 36 26 om) 3.6 37
29 8 36 24 18 39 35
3.0 a 34 33 5 38 29
3.0 2 34 25 9 34 3.0

‘ For example, for settlements negotiated in 1986, prior contracts cent, and total annual wage changes, Including those from COLA’s,
with COLA clauses provided specified annual wage changes averag- averaging 4.2 percent.
ing 2.7 percent; annual wage changes from COLA's averaging 1.6 per-

‘Table 5. Average changes in wages rates from COLA’s in major collective bargaining agreements, private Industry, 1966-95

Average change in wage rates from COLA’s for—
All workers under i Percent rate of
Year ve Workers with COLA changes return on the
cpr
Percent Cents per Percent Cents per
change hour change hour
03 12 16 55 NA
3 13 16 6.0 NA
& 25 37 14.6 NA
7 28 31 13.4 NA
7 34 2.0 88 NA
13 61 41 19.6 NA
19 10.1 58 308 NA
22 129 48 274 NA
16 10.1 35 22.1 NA
WwW 118 39 27.3 NA
24 18.1 5.0 374 NA
34 25.0 68 55.3 NA
28 26.5 77 718 NA
32 32.5 61 62.2 4
14 15.9 31 347 70
6 74 24 24.6 53
z) 11.3 27 32.9 50
7 92 22 277 58
2 27 1.0 12.6 51
5 68 26 33.6 “3B
& 79 27 375 47
7 102 33 476 61
7 9.6 27 40.5 4
5 75 2.0 32.0 56
4 64 2.0 34.3 62
2 3.6 13 226 48
2 43 WwW 30.7 6
2 42 17 31.3 55

1 The average COLA change was compared to the CPI change

during the period used in calculating the amount of COLA

changes.

29 Compensation and Working Conditions December 1996



Cost-of-living Clauses:
Trends and Current

Characteristics BY JANICE M. DEVINE

he fizz seems to have gone out of COLA’s—cost of living adjustment clauses,

that is. Compared with a peak of 61 percent in 1976, only 22 percent of workers

under major collective bargaining contracts in private industry were covered by a
COLA provision at the end of 1995, Additionally, in recent years average wage gains
generated by COLA’s have been at or near record lows.

The Bureau of Labor Statistics
defines COLA clauses as contractual
provisions in collective bargaining
agreements that automatically tie
wage changes to changes in the
Consumer Price Index (CPI).!
COLA clauses specify a payment
formula, the CPI index, the review
dates to be used to determine the
amount of any payments, and the
dates on which payments are
scheduled. This article presents a
teview of COLA coverage and
COLA payments in major private
industry collective bargaining
agreements (those covering 1,000 or
more workers) and summarizes the
major characteristics of COLA clauses
still in effect at the end of 1995.

Trends in coverage

While such formal arrangements
never were widespread throughout
the economy, COLA’s became quite
popular among the negotiators of

Janice M. Devine is an economist in the Of-
fice of Safety, Health and Working Conditions,
Bureau of Labor Statistics. Formerly, she was the
Project Director, Collective Bargaining Statistics
in Private Industry. Telephone (202) 606-6167.

>

major agreements. In 1966, the first
year for which the Bureau measured
the number of workers covered by
COLA provisions in all major
private industry collective bargain-
ing contracts, the proportion of
workers covered was 22 percent.
COLA coverage grew fairly steadily
to around the 60 percent level by
1975, where it remained through
1982.? Subsequently, the proportion
of workers covered by COLA
provisions declined almost continu-
ously through 1995, when it was
again 22 percent.? (See table 1.)
The decline in the proportion of
workers with COLA’s was accompa-
nied by a decline in the number of
workers with such provisions, from a
high of 6 million workers in 1975
and 1976 to a record low of 1.2
million in 1995.

The decline in coverage was less
pronounced in the manufacturing
sector, where COLA’s were more
prevalent, than in nonmanufacturing
industries. At their peak in 1976,
COLA clauses covered 71 percent of
workers under major collective

bargaining agreements in manufac-
turing industries and 54 percent in
nonmanoufacturing ones. (See table
2.) By the end of 1995, the propor-
tions were 58 and 7 percent for
manufacturing and
nonmanufacturing, respectively, with
nearly all industries having lost
coverage over the last two decades.
In six industries or industry
groups—tobacco, textiles, apparel,
instruments and related products,
miscellaneous manufacturing, and
services excluding health care—the
proportion of workers with COLA
provisions was higher at the end of
1995 than it was 20 years earlier.*
Seven industries had COLA cover-
age above 50 percent by the end of
1995, compared with 20 in 1976.
A combination of factors have
contributed to the decline in cover-
age. In the mid-1980s, Wallace
Hendricks and Lawrence Kahn
suggested that COLA coverage
would remain relatively stable until
workers were convinced that
inflation was under control.> Now
that seems to have occurred. With

Compensation and Working Conditions December 1996 24

TTI



relatively moderate increases in the
CPI in recent years, labor negotiators
seem to have been willing to forego
COLA’s, perhaps to gain or maintain
benefits in more pressing areas such
as job security, health care, and .
pensions,

In addition, the payments.
generated by COLA clauses have
been low for several years, undoubt-
edly contributing to workers’
willingness to eliminate these
provisions. Increasing restrictions
on COLA clauses, noted by
Hendricks and Kahn as beginning to
surface in the mid-1980s, have
affected the benefits workers

teceived from their COLA clauses.
Constraints include relatively high
“trigger” levels for changes in the
CPI that must be exceeded before
Payments begin, caps that limit the
amount of payments generated by
the COLA formula, diversions of
COLA payments to help pay for
other benefits, and the deferral of
Payments from the scheduled date to
a later period. Workers’ returns on
their COLA clauses also have
diminished because of smaller
increases in the CPI.

While much of the decline in
COLA coverage was due to bargain-
ers’ decisions to drop their COLA

provisions, employment losses in
industries where COLA clauses
tended to exist and in specific
contracts with COLA clauses also
contributed. For example, while
total employment in major collective
bargaining agreements declined 35
percent between 1982, the last year
in which COLA coverage was 60
Percent, and 1995, the employment
loss in the more COLA-prevalent
manufacturing sector was 54 percent
during the same period.

Settlements containing COLA '
clauses
COLA’s have generally been

Tabie 1.Workers under major collective bargaining agreements with COLA clauses, private Industry, 1966-95

(Workers in millions)
AW Workers with
Percent
Year! workers: COLA coverage inthe
Number Number Percent CPW
10.0 22 22 34
10.6 25 24 3.0
10.6 27 25 47
10.8 28 26 62
108 3.0 2B 55
10.6 43 4 33
10.4 41 c) 34 '
10.2 40 39 89 ‘
10.3 53 51 12.3
10.1 6.0 59 69
8.6 6.0 61 48
96 58 60 68
95 56 59 9.0
93 54 58 13.4
O41 5.3 58 12.6
88 5.0 57 a6
83 5.0 60 38
77 44 57 33
73 41 57 3.6
70 34 49 3.6
65 26 40 06
63 24 38 45
6.0 24 40 44
60 24 Ko) 45
5.9 23 3 61
56 17 cK) 28
55 15 28 29
55 13 24 25
54 13 24 27
54 12 2 25

1 Data are as of December 31 of each year.
2 December-to-December change in the Consumer

25 Compensation and Working Conditions December 1996

Price Index for UrbanWage Eamers and Clerical Workers.



Table 2. Prevalence of COLA clauses in major cotlective bargaining agreements covering 1,000 or more workers, 1976 and 1995

(Workers in thousands)
1976 1995
industry Percent of Percent of
sic Al workers sic All workers.
Code" workers | withCOLA Code? workers | with COLA
provisions provisions
All private industries ... 9,811 61 5,366 2
Manufacturing ... 4,321 7” 1,593 58
Ordnance and accessories: 19 3 74 NA NA NA
20 363 3 20 151 4
21 2B 5 21 10 100
2 49 18 2 18 2
23 518 40 23 148 56
24 81 0 24 16 0
7) 28 “4 2 3 oO
26 109 oO 26 51 o
27 61 68 27 21 2
2B 107 32 2B wu 17
2 51 0 29 7 o
Ko 96 89 ku) 45 i
3 62 13 3st 6 oO
32 EJ 32 31 28
3 631 95 3 124 18
u« 94 75 34 18 2
& 306 89 35 80 cy
36 476 90 96 1668 54
7 1,078 94 37 638 91
38 6 47 3 " 64
3 20 2 KJ 5 40
5,490 54 3,774 7
10-12 173 99 10-12 80 5
15-17 1,647, 10 15-17 987 (
40 472 100 40 217 o
41 116 97 4 6 0
‘Trucking and warehousing . 42 554 98 42 285 4
‘Water transportation 4 93 24 4 39 23
it 4 157 59 45 215 i)
47 2 100 47 : -
48 764 94 48 438 24
49 223 2 49 197 7
50-51 75 59 50-51 8 4
53,55-59 196 7 53,55-59 114 0
54 565 r4) 54 598 1
60-65 78 6 60-65 131 49
70-79;82 226 8] 70-79;82;89 279 W
80 102 31 60 181 1

| Standard Industrial Classification Manual, 1967 edition.
2 Standard industrial Ciassifcation Manual, 1987 edition.

3 More than 0 and less than 0.5 percent.
NA =Not applicable.

settlements COLAS COLAS
1985, 30.5 35.3 28.4
1986 32.0 34.0 31.1
1987 33.2 35.5 31.2
1988 33.3 36.3 32.4
1989 35.1 36.8 ws
1990 35.3 35.6 48
1991 35.6 382 348
1992 34.5 35.5 43
1993 35.8 365 35.5
1994 37.7 39.6 37.2
1995, 38.7 422 38.3

agreement.

viewed as a means to help protect
the purchasing power of wages from
the eroding effects of price increases
over the term of a collective bargain-
ing contract. Therefore, it is not
surprising that, as the adjoining
tabulation on average contract
duration in months for major
settlements indicates, the presence of
a COLA clause seemed to be
associated with longer contracts.

NOTE: Due to rounding, sums of individual itams may not equal
totals. Dashes indicate the absence of a major collective bargaining

The existence of COLA clauses
also seems to influence the specified
or guaranteed change in wage rates
provided by collective bargaining
settlements, particularly in the
manufacturing sector. Specified
average annual wage gains over the
contract life tended to be lower in
settlements with COLA clauses
compared to those without such
provisions. (See table 3.) The lower

Compensation and Working Conditions December 1996 26