The Trouble With Guaranteed Cost of Living Increases

A blog about business and economics.
June 8 2012 9:52 AM

The Trouble With Guaranteed Cost of Living Increases

Bruce Western and Jake Rosenfeld argue at some length that a revival of unionization would benefit most American workers, shaving GDP growth by 0.1-0.2 percent but increasing blue collar workers' compensation by 10-20 percent. 

It's a strong argument. But I always do want to note that there are actual reasons the postwar economic paradigm collapsed. Here for example they discuss the salad days of industry-wide pattern bargaining:

The benefits of unions protected American workers for more than half a century. The landmark development came in 1948, when General Motors and the United Auto Workers negotiated what came to be known as the Treaty of Detroit. The agreement approved an annual cost-of-living wage increase plus an additional annual increase of two percent. The cost-of-living adjustment ensured that wages would at least keep up with inflation. The extra two percent compensated workers for productivity boosts that came along with technological change

Having a cost of living adjustment clause in your contract is obviously excellent for your. I don't have one, and I wish I did. But there's a real problem with running an economy in which such clauses are widespread. Consider a situation in which a shortage arises of some crucial natural resource that's widely used as a production input. What happens here is that workers' productivity declines through no fault of their own. Real wages need to either temporarily fall, or else joblessness needs to temporarily rise. But if a large share of workers have automatic COLA clauses in their contracts, then wages go up as a result of the shortage rather than down. That means joblessness may need to go up quite a lot. But then the wage increases themselves become a source of further inflation. And yet the central bank may well want to try to respond to the increase in unemployment with looser money.

Next thing you know: Stagflation.

And this is more or less what happened in the 1970s with the oil shocks. Most people know about those shocks, the negative impact they had on the economy, and the role of disgruntlement with 1970s economic performance or the big paradigm shift in U.S. political economy occuring around 1980. But it's important to understand that this wasn't just a case of bad luck. Key elements of the postwar economic system were actually unsustainable. This cost-push inflation spiral issue could have been addressed through much more modest changes than the near-total destruction of private sector labor unions that we got. But something had to give. The system of the "good old days" simply wasn't robust enough to supply shocks.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.



The Ebola Story

How our minds build narratives out of disaster.

The Budget Disaster That Completely Sabotaged the WHO’s Response to Ebola

PowerPoint Is the Worst, and Now It’s the Latest Way to Hack Into Your Computer

The Shooting Tragedies That Forged Canada’s Gun Politics

A Highly Unscientific Ranking of Crazy-Old German Beers


Welcome to 13th Grade!

Some high schools are offering a fifth year. That’s a great idea.


The Actual World

“Mount Thoreau” and the naming of things in the wilderness.

Want Kids to Delay Sex? Let Planned Parenthood Teach Them Sex Ed.

Would You Trust Walmart to Provide Your Health Care? (You Should.)

  News & Politics
Oct. 22 2014 9:42 PM Landslide Landrieu Can the Louisiana Democrat use the powers of incumbency to save herself one more time?
Continuously Operating
Oct. 22 2014 2:38 PM Crack Open an Old One A highly unscientific evaluation of Germany’s oldest breweries.
Dear Prudence
Oct. 23 2014 6:00 AM Monster Kids from poorer neighborhoods keep coming to trick-or-treat in mine. Do I have to give them candy?
  Double X
The XX Factor
Oct. 22 2014 4:27 PM Three Ways Your Text Messages Change After You Get Married
  Slate Plus
Tv Club
Oct. 22 2014 5:27 PM The Slate Walking Dead Podcast A spoiler-filled discussion of Episodes 1 and 2.
Oct. 22 2014 11:54 PM The Actual World “Mount Thoreau” and the naming of things in the wilderness.
Future Tense
Oct. 22 2014 5:33 PM One More Reason Not to Use PowerPoint: It’s The Gateway for a Serious Windows Vulnerability
  Health & Science
Bad Astronomy
Oct. 23 2014 7:30 AM Our Solar System and Galaxy … Seen by an Astronaut
Sports Nut
Oct. 20 2014 5:09 PM Keepaway, on Three. Ready—Break! On his record-breaking touchdown pass, Peyton Manning couldn’t even leave the celebration to chance.