Testing for Efficiency Wages in Iran

Abstract

Efficiency wages is one of the recent new Keynesian theoreis providing a micro foundation to explain real rigidities in the labour market and long run involuntary unemployment. There are many empirical studies on efficiency wages in developed economies, but there is not a well documented evidence for this type of market imperfection in less developed economies. In this paper, we test for efficiency wages using the data from the Large Manufacturing Surveys in Iran for the period 1996-2005. In our model, we explain wage differentials in the manufacturing sector by a series of firm and employee characteristics, including ownership, size, industry type, education, skill, and gender. Our panel data estimation results indicate that state owned and large firms pay higher wages than private and smaller firms. They also show that education and skills have positive effects on wages, and that there is gender discrimination in the manufacturing section of the labor market. Finally, there are significant wage differentials in the manufacturing sector, even after controlling for all major variables, confirming the efficiency wages hypothesis in Iran.

Keywords: Efficiency wages, new Keynesian, large manufacturing survey, Iran

JEL Classification: J01, J16, J3, E24