Difference between Nominal Wages and Real Wages

This article will help you to learn about the difference between nominal wages and real wages.

Difference between Nominal Wages and Real Wages

Economists have differentiated between nominal wages and real wages. 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 the amount of goods and services that a worker purchases from his/her nominal wages. Therefore, real wages are the purchasing power of nominal wages.

According to classical theories, the supply of labor is determined by the real wages. However, according to Keynes, the supply of labor depends on the wages received in terms of money or nominal wages. Let us understand the difference between nominal wages and real wages with the help of an example. Suppose a worker earns Rs. 100 per day and his/her wages are increased to Rs. 120. In such a case, it is not necessary that his/her economic condition or purchasing power will increase.

The economic condition of a worker depends on the amount of goods and services he/she can purchase with nominal wages. In case, the prices of goods and services are doubled, the worker would need the double amount of his/her nominal wages what he/she is getting at present to purchase goods and services. Therefore, the economic condition of an individual is determined by his/her real wages.

The following is the formula for determining real wages:

W= (NW/P) * 100

Where

W= Real wages

NW=Nominal Wages

P= Level of price.