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A contract raises hourly pay only when the cost of living rises above 4 percent in a year. In a year when living costs rise 3 percent, what happens to pay?
AHourly rates rise by the full 3 percent recorded
BHourly rates fall by the shortfall of 1 percent
CNo cost-of-living adjustment is made that year
DThe contract is reopened for fresh negotiation
Answer & Solution
Correct answer: C. No cost-of-living adjustment is made that year
1. A cost-of-living clause links hourly rates to the annual rise in living costs.
2. The clause here carries a threshold, which is set at 4 percent.
3. Pay rises only when the annual increase in living costs runs above that threshold.
4. The rise in this year is 3 percent, which is below the threshold.
5. So no cost-of-living adjustment is made for that year.
6. Option A ignores the threshold entirely, option B invents a pay cut that no such clause provides for, and option D confuses a routine annual test with a reopening of the whole contract.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 8 "Managing Human Resources and Labor Relations", section Wage and Benefits_
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