Does pay affect productivity or react to it?

There may be a bi-directional relationship between wages and labor productivity. According to conventional theory, employers reward improvements in productivity by raising pay. It also has been argued that wage increases can provide an incentive to improve productivity. This study applies a technique by Geweke to identify the feedback between pay and productivity in U.S. manufacturing. For the 1949-1998 period, measures of directional feedback indicate that both “pay as reward” and “pay as incentive” behaviors have occurred, but the results vary across manufacturing subsectors.