Real Wage

Real Wage

The term real wages refers to wages that have been adjusted for inflation. This term is used in contrast to nominal wages or unadjusted wages. Real wages provide a clearer representation of an individual's wages, but suffer the disadvantage of not being well defined, since the amount of inflation, based on different goods and services, is itself not well defined.

The use of adjusted figures is used in undertaking some forms of economic analysis. For example, to report on the relative economic successes of two nations, real wage figures are more useful than nominal figures. The importance of considering real wages also appears when looking at the history of a single country. If only nominal wages are considered, the conclusion has to be that people used to be significantly poorer than today. However, the cost of living was also much lower. To have an accurate view of a nation's wealth in any given year, inflation has to be taken into account and real wages must be used as the measuring stick.

An alternative is to look at how much time it took to earn enough money to buy various items in the past. Such an analysis shows that for most items, it takes much less work time to earn them now than it did decades ago, at least in the United States.

Real wages are a useful economic measure, as opposed to nominal wages, which simply show the monetary value of wages in that year. However, real wages does not take into account other compensation like benefits or old age pensions.