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

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  • Wallace E. Hendricks
  • Lawrence M. Kahn

Abstract

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.

Suggested Citation

  • Wallace E. Hendricks & Lawrence M. Kahn, 1983. "Cost-of-Living Clauses in Union Contracts: Determinants and Effects," ILR Review, Cornell University, ILR School, vol. 36(3), pages 447-460, April.
    • Handle: RePEc:sae:ilrrev:v:36:y:1983:i:3:p:447-460
    DOI: 10.1177/001979398303600309
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    Cited by:

    1. Christofides, Louis N. & Peng, Chen, 2006. "Contract duration and indexation in a period of real and nominal uncertainty," Labour Economics, Elsevier, vol. 13(1), pages 61-86, February.
    2. Robert Rich & Joseph Tracy, 2004. "Uncertainty and Labor Contract Durations," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 270-287, February.
    3. Louis Christofides & Amy Chen Peng, 2007. "Real Wage Chronologies," CESifo Working Paper Series 2096, CESifo.
    4. Amy Peng & Louis N. Christofides, 2009. "Real Wage Chronology," Working Papers 011, Toronto Metropolitan University, Department of Economics.
    5. Josep Tribo, 2005. "An analysis of the length of labour and financial contracts: a study for Spain," Applied Economics, Taylor & Francis Journals, vol. 37(8), pages 905-916.
    6. Murphy, Kevin J., 2000. "What effect does uncertainty have on the length of labor contracts?," Labour Economics, Elsevier, vol. 7(2), pages 181-201, March.
    7. Louis Christofides & Chen Peng, 2006. "Major Provisions of Labour Contracts and their Theoretical Coherence," CESifo Working Paper Series 1700, CESifo.
    8. Fregert, Klas & Jonung, Lars, 1998. "Monetary Regimes And Endogenous Wage Contracts: Sweden 1908-1995," Working Papers 1998:3, Lund University, Department of Economics, revised 21 Apr 1999.

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