Can someone please explain to me, in laymans terms, the difference between "real wages" and "money-wages"?
Asked by
rojo (
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March 5th, 2018
I have the dictionary definitions:
“Money wages or nominal wages are wages that are paid to a person regardless of the inflation rate in the market. Money wages do not take into consideration the purchasing power and the employee receives the amount that is promised to him when he/she is hired. Real wages are wages that provided taken into consideration the inflation amount. Real wages are wages that determine the purchasing power of the individual or how much goods the salary can buy. Real wages can also be defined as the amount of goods and services that can be bought from the individual’s wages after taking inflation into account.”
What does this really mean in plain, non-economic language.
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4 Answers
** Disclaimer: I’m not an economist!
The way I see it used is like this:
If I get paid $20 per hour, this is the nominal wage. The real wage is the purchasing power of that $20.
In other words, $20/hr in 1970 = nominal wage of $20. However, $20/hr in 1970 is a significantly higher real wage than $20/hr in 2018. That is because $20 could purchase a lot more in 1970.
That’s why when people talk about wage stagnation, they’re talking in terms of “real wages”. While nominal wages have increased since the 70s, Real wages have not for much of the workforce.
In real wage terms, if one earned $20,000 per year in 1970, you would have to earn $130,000 in 2017 to be equivalent.
The Federal minimum wage is $7.25. In 1968 it was $1.60, but in real wage terms it was the equivalent of $10.65 today. Minimum wage earners were much better off 50 years ago than they are today.
These are fake numbers, but let’s say you made 20 units of currency per hour, and each loaf of bread costs 1 unit of currency. You can earn 20 loaves of bread per hour. Now say over the next ten years inflation has doubled, and your wages have increased by 10 units of currency per hour. Now you make 30 units of currency per hour but a loaf of bread costs 2 units. That means you earn 15 loaves of bread per hour (5 less than before). Even though your money wages has increased by 50% over those 10 years, your weal wage buying power has actually decreased by 25%.
I hope that was helpful.
Thanks to all who took the time to clarify this for me. Knowing what he is talking about helps understand Keynes.
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