Working Paper: NBER ID: w0998
Authors: Ronald G. Ehrenberg; Leif Danziger; Gee San
Abstract: 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.
Keywords: cost-of-living adjustments; union contracts; labor economics; risk sharing
JEL Codes: J51; J52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| level of unemployment insurance benefits (J65) | level of layoffs (J63) |
| level of unemployment insurance benefits (J65) | extent of COLA coverage (G52) |
| presence of COLA provisions (J52) | likelihood of strikes (J52) |
| likelihood of strikes (J52) | aggregate output (E10) |
| COLA provisions (H55) | macroeconomic stabilization (E63) |
| employee risk aversion (D81) | optimal degree of wage indexation (J38) |
| expected inflation (E31) | optimal degree of wage indexation (J38) |