Protecting Wages From Inflation

Tiran Bajgiran

Tiran Bajgiran is a student at Harvard Law School.

“No COLA, no beer!” chanted striking workers across British Columbia’s liquor stores this summer — demanding not the soda, but cost-of-living adjustment clauses that protect wages against inflation.

Canadian workers, across sectors, are fighting for COLA clauses that address the brunt of spiraling costs. While gocery chains make unprecedented profits, Canada’s Consumer Price Index increased by 7.6 % in July. The price of food, gasoline and other consumer goods is rising faster than most workers’ wages can keep up. Average prices rose by 6.7% since then — while average wages fell by 1.6%.

What Is a COLA Clause?

A COLA clause is a piece of language in a union’s collective agreement which requires that the rate of inflation is taken into account when wage rates are set. Essentially, COLA clauses tie negotiated salary increases to inflation rather than setting a predetermined amount. Agreements often specify a base wage raise, which increases if inflation exceeds a certain level. If inflation ticked up to six percent in, say, year two of a contract deal where workers were slated for a three-per-cent raise, a COLA clause could bump it to nine percent, for instance.

In essence, a good COLA clause does two things. First, it provides a short-term salve against temporary increases in the cost of living by guaranteeing wages will keep pace with expense. Second, it gives insurance that future inflation will be accounted for at the moment it occurs rather than after the fact, thereby providing income security for those covered by it. That sense of security is crucial for union organizers, which is why COLA clauses get more popular not only when inflation is high, but also when it is volatile. Indexing provides a hedge against uncertainty.

The Rise and Fall of COLA

Throughout the high-inflation years of the 1970s, unions in Canada made cost-of-living issues a serious priority at the bargaining table and the picket line, achieving significant gains in the process. So intense was the push for COLA in the high-inflation years that Quebec construction unions actually boycotted contractors who did not include cost-of-living indexing in their contracts. The Confédération des syndicats nationaux in Quebec, meanwhile, called upon the provincial government to legislate mandatory COLA clauses in collective agreements.

Data from the 1970s and 1980s shows how heightened inflation and COLA clauses went hand in hand. In 1980, 45 % of new Canadian collective agreements covering almost 70 percent of unionized workers included a COLA clause.

Stable inflation all but did away with such clauses, but that doesn’t mean there isn’t a place for them at the negotiating table again. Of course, the inflationary pressures we face now — against the backdrop of decades of declining real wages — raises doubts about explanations that fault wage growth for inflation woes.

Now, COLAs are enjoying a comeback.

The COLA Comeback

Canada’s unionization rate is currently about 27%, compared to 10% in the US and 24% in the UK. Federal government data that tracked seven major union settlements from March and April showed an annual average wage increase of 3.1 percent, which is almost double what unionized workers were signing up for between March 2020 and January 2022.

Unions in Canada have started taking it upon themselves to return COLAs to their former glory. A multi-month strike by transit drivers in Whistler, British Columbia, was brought to an end in June 2022 when a mediator proposed the introduction of a clause which would guarantee a wage increase directly pegged to inflation.

Deals secured by the British Columbia General Employees’ Union (BCGEU) and the Hospital Employees’ Union (HEU), meanwhile, have a guaranteed wage increase of 5.5 percent alongside inflation indexing up to 6.75 percent.

Neither of these COLA clauses are perfect. Whistler Transit System’s pays out only in 2024, and therefore doesn’t give drivers the support they need in the here and now. The cap on BCGEU’s, meanwhile, raises concerns at a time when inflation continues to be around 7 percent. Indeed, it was due to these concerns that both the BCGEU’s and HEU’s new contracts barely passed ratification — workers want real raises. Compared to the wage agreements of the 1970s, these increases are modest. Both COLA and non-COLA collective agreements produced wage increases of over 10 percent with regularity during the high-inflation years.

Workers Shouldn’t Pay the Price for Inflation

For many employers, inflation provides an opportunity to diminish workers’ expectations. Governor of the Bank of Canada Tiff Macklem recently clutched his pearls in an address to Canada’s small business lobby about the prospect of a wage-price spiral. Don’t give in to increased wage demands, he implored them. Keep your labor costs low! Just like in the 1970s, workers are scolded for greed at the same time that the price of existence goes out of control.

By indexing wages to inflation labor can also dodge accusations of contributing to inflation through out-of-control wage demands. Indexing keeps the real cost of labor static relative to inflation, thereby making sure that inflation drives wages, rather than vice versa. For example, the Service Employees International Union (SEIU) Local 503 in Salem, Oregon, recently ratified a contract that gives workers a 2.5-percent cost-of-living adjustment each year of the four-year agreement. This increase applies to all rates on the salary scales. This was an important win in the contract because annual salary increases were suspended. Absent the COLA provision, workers would be subjected to potential expense increases without a wage increase to cover them. 

The most effective way to sustain our living standards in periods of high inflation is for all governments to make it easier for workers to unionize, just as the John Horgan government did by introducing single-step union certification in British Columbia. Using the power of collective bargaining to find creative ways — such as COLA clauses — to adjust wages, is the surest way to stabilize industries and build good jobs.

Economists at Canada’s biggest banks claim that the solution is mass unemployment. Workers say that the solution is inflation indexing.

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