Forever Young Mr. J.K. Galbraith! Executive Pay, Unfair Wages and Economic Growth

We examine the idea that excess managerial compensation acts as a reference wage in a fair wage-effort model of efficiency wages. We utilise the Australian Business Longitudinal Survey (1995-98) and the BHPS (1990-2002) to estimate the impact of excess managerial pay on labour productivity and worker pay satisfaction. We account for human capital wage effects. The evidence provides the following new insights: (a) the efficiency wages premium boosts productivity; (b) non-productivity related excess managerial pay has a detrimental effect on labour productivity and worker pay satisfaction; (c) premium efficiency wages correlate positively with excess managerial pay; (d) Bewley's (1998) claim of an asymmetric efficiency wages effect is confirmed: both the efficiency wage and the excess managerial pay effects are much larger in bad times, and (e) the change in the unemployment rate exerts has a positive but modest effect on productivity