Disentangling the wage-productivity relationship: Evidence from select OECD member countries

Conventional theory proposes that firms reward productivity improvements with higher wages. Conversely, efficiency wage theory suggests that wages can induce greater productivity. This paper applies a statistical technique that disentangles the potential bidirectional feedback between wages and productivity. Wage strategies in six industrialized countries with various labor market institutions are examined. Conventional and efficiency wage practices vary systematically across the industrialized countries; these variations are consistent with the expected effects of labor market institutions.