page_title: Real wages
section_title: Example
hierarchical_section_title: Real wages / Example
caption_attribution_description: English: Illustration of How Workers Can "Get Ahead" Despite Seeing Smaller Wage Increases in Paychecks
context_page_description: Real wages are wages adjusted for inflation, or, equivalently, wages in terms of the amount of goods and services that can be bought. This term is used in contrast to nominal wages or unadjusted wages.
  Because it has been adjusted to account for changes in the prices of goods and services, real wages provide a clearer representation of an individual's wages in terms of what they can afford to buy with those wages – specifically, in terms of the amount of goods and services that can be bought. However, real wages suffer the disadvantage of not being well defined, since the amount of inflation is itself not well defined. Hence real wage defined as the total amount of goods and services that can be bought with a wage, is also not defined. This is because changes in the relative prices.
  Despite difficulty in defining one value for the real wage, in some cases a real wage can be said to have unequivocally increased. This is true if: After the change, the worker can now afford any bundle of goods and services that he could just barely afford before the change, and still have money left over. In such a situation, real wage increases no matter how inflation is calculated.
context_section_description: Consider an example economy with the following wages over three years. Also assume that the inflation in this economy is 2% per year:
  Year 1: $20,000
  Year 2: $20,400
  Year 3: $20,808
  Real Wage = W/i (W= wage, i= inflation, can also be subjugated as interest).
  If the figures shown are real wages, then wages have increased by 2% after inflation has been taken into account. In effect, an individual making this wage actually has more ability to buy goods and services than the previous year. However, if the figures shown are nominal wages then real wages are not increasing at all. In absolute dollar amounts, an individual is bringing home more money each year, but the increases in inflation actually zeroes out the increases in their salary. Given that inflation is increasing at the same pace as wages, an individual cannot actually afford to increase their consumption in such a scenario.
  The nominal wage increases a worker sees in his paycheck may give a misleading impression of whether he is "getting ahead" or "falling behind" over time. For example, the average worker’s paycheck increased 2.7% in 2005, while it increased 2.1% in 2015, creating an impression for some workers that they were "falling behind". However, inflation was 3.4% in 2005, while it was only 0.1% in 2015, so workers were actually "getting ahead" with lower nominal paycheck increases in 2015 compared to 2005.
caption: Higher wage growth in workers' paychecks, if accompanied by higher inflation, can result in lower purchasing power for workers than during a period with lower nominal wage growth combined with lower inflation. Data: https://fred.stlouisfed.org/graph/?g=mwFz
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