Concept Of Money Wage And Real Wage
Wages refer to the compensation paid to an individual after successful completion of a task assigned. An individual who does the labor or services for a company can be compensated in terms of money or any other benefits agreed upon.
- Hourly Wage Rates By State
- Concept Of Money Wage And Real Wages
- Concept Of Money Wage And Real Wage System
- What Do You Mean By Real Wage
There are two main kinds of wages- (1) Nominal wages and (2) Real wages. The term ‘nominal wages’ refers to money wages. But the term ‘real wages’ refers to the commodities and services that the money wages can provide. The standard of living of workers relies on real wages and not on money wages. Meaning of Wages: Wages are the remuneration or reward for labour. There are two main kinds of. Nominal wages are the wages received by a worker in the form of money. Therefore, nominal wages are also called money wages. For example, a worker gets Rs. 200 from his/her organization in exchange of services rendered by him/her. In this case, the amount of Rs. 200 is regarded as a nominal wage. On the other hand, real wages can be defined as.
These benefits that are termed as fringe benefits could include accommodation, travel and entertainment allowances. Some jobs however don’t have a salary package attached to it. These jobs fall in the category of temporary jobs and are compensated in two types of wages either real wage and money wage. Money wage is also referred to as nominal wage.
What is a Real Wage?
Real wages are the type of wages that take inflation rates into consideration. These wages determine the purchasing power the individual has and the amount of goods or services the individual can purchase given the current market conditions. In other words, it can also be defined as the actual amount of goods and services the employee can purchase with the payments given after inflation has been considered.
The author J.L Hanson, states that real wages are the wages in terms of goods and services that can be purchased with the. Real wages indirectly affect nominal wages as the real wage rises employees can easily demand for more money wages. Real wages can be a guide to indicate the changes in living standards.
A great example to show this is:
If the actual wages were increased by 4% and the inflation in the region was 4%, this would mean purchasing power of the wage is the same. However, if the actual wage increased by 3% and the inflation was at 4%, the purchasing power of the same amount will not be the same, your real wage is at -1%. The official formula for real wages is Real Wage = (Old Wage * New CPI) / Old CPI, CPI here represents Consumer Price Index.
What is a Nominal Wage?
Nominal or money wages are the payments done to workers in money form and do not take account of inflation rates and any other market conditions. For example, if a worker receives $15 per hour from their organization in exchange of the services or labor provided, then that is the nominal wage. Nominal wages don’t have a calculation or formula. The basic determinants of the nominal wages would be the government regulations and the organization’s compensation policy within its capacity.
Differences Between Real Wages and Nominal wages
Definition of Real and Nominal wages
Real wage refers the compensation that takes inflation into consideration in the tabulation.
Nominal wages on the other hand is just the payment done for labor done within an organization.
Determinants of Real and Nominal wages
Real wages are determined by the inflation rates and consider the purchasing power of a given compensation amount.
Nominal wages however, don’t consider inflation and any market conditions. It is mostly determined by the government set regulations such as minimum wages.
Formula used for Real and Nominal wages
Real wage is determined by a specific formula; Real Wage = (Old Wage * New CPI) / Old CPI where (CPI is Consumer Price Index).
Nominal wages are not derived from any formula or mathematical calculation. It is simply based on what the organization is willing to pay as compensation under the government regulations.
Purpose
The purpose of real wages is to maintain the purchasing power during changes in market conditions such as inflation. Real wages help one determine the change in purchasing power by determining exactly what goods and services can be purchased with the wages paid.
Nominal wages purpose is to compensate the time and efforts put into completing a task assigned.
Time Frame
Real wages take into account different periods in time, e.g the past years market conditions.
Nominal wage only considers the current point in time.
Real Wages vs. Nominal Wages
Summary of Real Vs. Nominal wages
- Real and nominal wages are types of compensations done based on labor or services provided.
- Real wages are determined by the inflation rate and take into consideration the purchasing power of the amount paid as compensation. Nominal wages don’t consider inflation and are solely based on the current government regulations.
- Real wages are calculated with the following formula RW= (* New CPI) / Old CPI while nominal wages have no formula.
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David Ohanian has a new paper that argues that Hoover's efforts to keep firms from cutting wages led to the high unemployment during the Great Depression.
While excessively high real wages might cause a surplus of labor and unemployment, focusing on high real wages is a mistake when describing the consequences of a shortage of money and a general glut of goods. While a careful reading of Ohanian's paper shows that he understands the central role of monetary disequilibrium, less careful readers may be confused.
Unemployment looks like a surplus of labor. Basic supply and demand analysis implies that a surplus of any good exists when its price is above equilibrium. A lower price of the good raises quantity demanded, reduces quantity supplied, and clears up the surplus. And so, a lower price is the solution to a surplus.
In the labor market, the wage is the price. Unemployment looks to be the result of wages above equilibrium. A lower wage rate should increase the quantity of labor demanded, decrease the quantity of labor supplied, and clear up the surplus. Isn't it obvious that lower wages are the solution to unemployment?
Basic supply and demand analysis is based up relative prices, the ratios of the money prices of different goods. A surplus exists for a good when its relative price is above equilibrium, and a lower relative price clears it up. In labor markets, the parallel concept is the real wage--the money wage relative to the money prices of goods and services. A surplus of labor (and apparently, unemployment,) would be due to real wages being above equilibrium. Wages are high relative to the prices of products. Real wages need to fall, clearing up the unemployment.
However, if the quantity of money is less than the demand to hold money, the result will be a net surplus of other goods, including currently-produced goods. Since firms will not produce goods they cannot sell, output declines. And with less output to be produced, firms demand less labor. A surplus of labor can exist without there being any change in real wages.
The problem, however, is money prices of all sorts, including resource prices like labor, are too high. A drop in all money prices, including money wages, will result in a higher real quantity of money. As the real quantity of money rises to meet the demand to hold money, the shrinking shortage of money is matched by a reduced surplus of goods. The growing demand for goods and services should result in firms producing more and hiring more labor. While both money prices and money wages need to fall, they need to fall at least roughly in proportion. Real wages are not too high and do not need to fall.
There is, however, a realistic disequilibrium process where excessively high real wages develop and appear to be the cause of unemployment. When there is a surplus of a good, each firm is motivated to lower money prices. And while firms are also motivated to cut wages when there is a surplus of labor, goods prices may adjust more rapidly than wages. If this occurs, then surpluses of products and labor will result in money prices falling more than money wages, so real wages rise.
The sticky adjustment of money wages slows the decrease in the prices of goods and services. From the point of view of each firm, it cannot continue to lower prices if costs do not fall as well. Production must be reduced. It is possible to conceive of an 'equilibrium' where the firms are maximizing profit (or minimizing loss,) output matches sales (at a depressed level) and there is a surplus of labor, with continuing downward pressure on money wages.
Hourly Wage Rates By State
In this 'equilibrium,' as the surplus of labor continues to result in falling wages, cost fall, and supply rises. The profit maximizing (or loss minimizing) level of output is higher. Firms lower prices less than in proportion to the decrease in costs, and real wages fall.
However, the key element of the process is that the lower prices are increasing the real quantity of money and clearing up the underlying shortage of money. This is what increases the demand for goods and services, and so increases the demand for labor as well.
Concept Of Money Wage And Real Wages
The emphasis on the changes in real wages is just a red herring. The problem is that sticky prices are hindering the adjustment of the real quantity of money to the demand for money. Some prices can be more sticky than others, and the adjustment process involves increases in the relative prices of goods whose money prices are more sticky and decreases in the relative prices of the goods whose prices are more flexible.Because unexpected changes in the price level (including wages,) involve shifts between debtors and creditors, and because deflation of prices