In economics, real wages are wages that are adjusted for inflation. Wages that are not adjusted for inflation are called nominal wages. Real wages are useful in many types of economic analysis because they allow actual levels of wealth to be compared between two different countries or time periods. Numbers used for real wages are always in terms of a monetary value at some particular time, called the base year. For example, the dollar value in the United States from the year 2009 could be referenced as “2009 Dollars.”
Inflation occurs when the general level of prices for goods and services rises over time. When this occurs, the same unadjusted wage can buy a person less and less each year. Inflation can have some negative effects in an economy, but many economists agree that some amount of inflation can be a good thing. It can help a country get out of a recession and provide debt relief by reducing the real value of the debt.
If a person’s annual wage in 2009 was $30,000 US Dollars (USD), it would have to increase to $30,600 USD in 2010 to keep pace with a 2% rate of inflation. This just means that the person’s nominal wage would have to increase by $600 USD to be able to buy the same amount of goods the following year. The person’s real wage in 2010 would be $30,000 because this is the figure after it is adjusted for inflation. If real wages are used in this instance, the figures are given in 2009 Dollars.
Real wages are also useful in comparing changes in two different countries’ relative wealth. One country’s average wage may be increasing more than another’s, but if its inflation rate is also higher, it can be difficult to determine which country is actually becoming richer. By using real wages that are adjusted to each country’s inflation rate, it is easier to tell which country is experiencing a greater rise in wealth.
Real versus nominal values are used in economics in many other areas. Prices of goods, government spending levels, and the gross domestic product of a nation are all commonly dealt with in real values rather than in nominal values. Real values are concerned with some actual material quantity and do not include price fluctuations. The ability to easily visualize changes in wealth makes real values a useful tool in economics.