The Difference Between Real and Nominal Wages? In economic science, it is customary to distinguish between real and nominal wages. What do they represent?
What is the essence of real wages?
Real wages are generally understood as the average earnings of a country’s citizens in terms of their actual purchasing power. This income should be considered in different time periods relative to the rise in prices for various goods or services.
For example, if a citizen’s salary is 30,000 rubles, they can hypothetically buy 3 televisions in January and 6 in July (which may be due to changes in exchange rates that have led to lower prices for consumer electronics). In this case, a twofold increase in a person’s real wage can be observed over a 6-month period in terms of its purchasing power for buying televisions.
In practice, the purchasing power of wages in economic science is often evaluated with consideration of inflation in the country. So, if inflation in the country’s economy was 3% from January to July (regardless of television prices, although they may have some influence), with the person’s income remaining unchanged, their real wage can be viewed as having decreased by 3%.
Inflation can be either negative, and if we assume that is the case, it is possible to record an increase in real wages even if the person’s salary hasn’t changed. Again, the purchasing power of a citizen’s earnings can significantly differ for individual goods or services when compared to inflation.
The increase in the average real wage characterizes the dynamic development of the country’s economy. Its decrease usually indicates problems in the national economy and the need for a revision of the development strategy by competent authorities.
What is the essence of nominal wages?
Nominal wages are generally understood as the average earnings of a citizen, calculated in the national currency or, if necessary, in one of the foreign currencies. Similarly, nominal wages are assessed within a specific time period—whether they increase, decrease, or remain almost unchanged.
The purchasing power of a citizen’s earnings, represented by nominal wages, is usually assessed indirectly (e.g., by considering its amount in foreign currency and determining whether citizens’ salaries have increased or decreased relative to those in other countries). Inflation is not taken into account when determining this indicator.
It is worth noting that the increase or decrease in nominal wages is not always accurate economic indicators. However, in general, the same pattern can be observed here as in the situation with real wages: if citizens’ earnings are nominally increasing, it may be a sign of economic growth, and if they are decreasing, it often indicates problems in the national economy.
Comparison
The main difference between real and nominal wages is that the former financial indicator presupposes the determination of the purchasing power of earnings considering inflation and other criteria reflecting changes in prices, making it a significant economic indicator. The latter can indirectly characterize the pace of economic development but is also used to assess the state of the national economy when necessary as a supplementary indicator.
It is worth noting that nominal wages, expressed in the national currency of a country, are generally the primary indicator for calculating real wages. In cases where the first type of income increases, for example, by 10%, while inflation remains at 10%, it can be noted that real wages have not increased.
Thus, despite the noted difference, these economic indicators are closely related. Real wages cannot be determined without nominal wages. However, unlike real wages, nominal wages are generally not a significant economic indicator.
