Real wages – definition

Real wages are nominal wages adjusted for the effects of inflation. Changes in nominal wages can be expressed as an index, and if we divide this by changes in the price level (and multiply by 100) we can derived an index for real wages.

Example:


YearNominal wageIndex
201850,000100
201955,000110

Hence the index of nominal wage changes is 100 in 2018 (the base year) and rises to 110 in 2019 given that nominal wages increase by 10%


YearCPI inflationIndex
20192%102

If we divide the nominal wage index by the inflation index and multiply by 100, we can derive the real wage index.

 

110x 100
102

Which equals 107.8. Hence real wages increased by 7.8% in 2019.