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The main objective of this study is to examine the efficiency wage theory for Iranian factory industries in the 2-digit International Standard Industrial Classification (ISIC) level in 2001-2011. According to the efficiency wage theory, which is in fact one of the New Keynesian Economists Theories in labor market, reduction of wage is not explainable even under stagnation conditions. This is because; with reduction of wage, the best laborers leave their job and this can decrease workforce productivity. Therefore, in this theory, there is direct correlation between wage and productivity. In other words, efficient wages can enhance productivity. In this study, panel data regression has been used to test the said theory. The results obtained from estimating different models show that efficiency wage theory is not confirmed for Iranian industries. In other words, higher wages can improve productivity and efficiency of laborers in factory industries of Iran.
