Pay and Productivity in a Corporatist Economy : Evidence from Austria

Conventional theory predicts that productivity gains lead to hikes in real pay. Efficiency wage theory hypothesizes that pay increases can lead to productivity improvements. But would such results be observed in a corporatist economy with centralized bargaining? For the case of Austria, a corporatist archetype, this study uses an innovative technique developed by Geweke to disentangle the relationship between pay and productivity. There already has been empirical evidence that pay demands in corporatist economies are relatively modest. Moreover, it has been claimed that corporatist coordination enhances the efficiency of labor contracts, by providing a mechanism to adjust to aggregate shocks. Our findings uncover another efficiency benefit of corporatism. For laborers in manufacturing, we find that wage hikes result in productivity gains. Managers, then, are rewarded following improvements in productivity