Dynamics of Wages and Labor Productivity in The Manufacturing Industries of Iran

Wage adjustment and its relation with labor productivity are factors in firms’ decision making. This paper aims to identify the dynamics of wages and labor productivity on the basis of data available for manufacturing sector in Iran. The techniques used in this paper are ARDL and ECM models. The results show that labor productivity, average years of education of employees, and minimum wage rate have positive effects on real wage in manufacturing sector. The results are valid in both short-run and long-run analysis. The findings also indicate that wages in manufacturing are driven in the short run by the wages in public sector, however, the opposite is not true. On the basis of such finding, it is suggested that wage policy should target the real wages by increasing the productivity of labor force engaged in manufacturing sectors.