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The main objective of this study is to investigate the role of labor productivity in wage setting in the manufacturing sector of Iran. For this purpose, the wage bargaining model has been estimated in the manufacturing sub-sectors(mainly large firms) by applying panel data method with fixed effect over 1998-2003.The results indicate that both explanatory variables-labor productivity and substitute wage rate- have positive impact on the wage rate, but the coefficient of labor productivity is smaller than the substitute wage coefficient, this implies that in the manufacturing sector of Iran, the substitute wage rate has more influence on the wage rate determination than the labor productivity.
JEL Classification : E24, J2, J3, J5