Pay and productivity in “corporatist” Germany

Conventional theory predicts that productivity gains lead to pay hikes. Pay increases, however, can influence labor productivity. But what about the case of a corporatist economy, in which wage setting is highly coordinated? With cor-poratist cooperation between unions and management, is pay de-coupled from productivity? Using an innovative technique, this study disentangles the rela-tionship between pay and productivity in Germany. Citing high unemployment and increasingly global competition, critics have argued that Germany's brand of corporatist labor relations cannot survive. Our findings show that links between productivity and pay were different in the 1990s than in earlier years, suggesting that the collective bargaining process now works differently.