11 Determinants of Real Wages – Discussed!

The following are the determinants of real wages:

i. Nominal Wages:

Refers to the fact that if there is an increase in the nominal wages, then real wages would also increase.

Therefore, there is a direct relationship between nominal wages and real wages.

For example, if the nominal wages of an employee increase from Rs. 6000 to Rs. 8000, then his/her real wages would also increase.

Apart from this, if nominal wage of an individual is more as compared to another individual, then the real wages of the former would be greater than the real wages of the later. Similarly, if the nominal wage of a college lecturer is Rs. 20,000 and that of a school teacher is Rs. 15,000, then the real wage of the lecturer would be greater than the real wage of the school teacher.

ii. Purchasing Power:

Helps in comparing wages at different places and in different time period. The purchasing power of money and the price level are inversely proportional to each other. This implies that if the price level is high, then the purchasing power would be low. As a result, real wages would also below.

Therefore, real wages are directly influenced by the purchasing power or price level. The purchasing power of individuals is different in different locations and different time period. For example, in rural areas of India, an individual can lead a more comfortable life even in Rs. 3000 as compared to an individual residing in a metropolitan city.

In such a case, the real wages of the individual in the rural area is more than that of the individual in the metropolitan city. If we take the example of time period; at the time of inflation, the rise in the prices of a product is much higher than the rise in the nominal wages of an individual.

As a result, real wages would be low due to decrease in the purchasing power. On the other hand, when the prices start falling, the fall in prices of product is greater than the fall in nominal wages of an individual. Consequently, the real wages and purchasing power would increase at this point of time.

iii. Subsidiary Earnings:

Refer to the extra benefits that a worker receives from the employer, such as lodging, free board, bonus, medical facilities, and educational allowances for children. In addition, any type of additional earning from part time jobs is also termed as subsidiary earnings. For example, lecturers get subsidiary earnings by checking examination papers and tuition fees. Subsidiary earnings result in an increase in the nominal wages of an individual. Consequently, the real wages of an individual also increases.

iv. Overtime Without Extra Earning:

Refers to the work done by employee without wages. In some cases, an employee needs to do extra work without getting wages for that work. This results in the decrease of real wages of that worker. For example, domestic workers get wages for working in the office hours. However, they need to work before and after the office hours without getting any extra wage for that. This reduces their real wages to certain extent.

v. Nature of Employment:

Refers to the type of employment that affects the real wages of an individual. In case, the employment is permanent, then the nominal wages are low, but real wages are high. On the other hand, in the temporary employment, nominal wages are high, but real wages are low. For example, an individual earning Rs. 500 daily in a permanent job, then he/she would be more secure in investing or saving money.

This is because in permanent job, an individual is sure about receiving regular income. However, an individual earning Rs. 2000 in a temporary job, then he/she would not be comfortable in investing and saving money. As a result, real wages decrease.

vi. Working Conditions:

Constitute an important determinant of real wages. For example, if a labor is working in a hygienic and healthy environment, then his/her real wages would be more. On the other hand, if a labor is working in unhygienic conditions, then his/her real wage would be low. This is because a labor who is working in a hygienic environment is not required to spend his/her nominal wages on medical facilities, which, in turn, increases his/her purchasing power and real wages.

vii. Trade Expenses:

Refers to one of the important determinants of real wages. In case, a worker is required to spend a part of his nominal wages on trade expenses, then his/her real wages would be less. For example, a college professor and a bank accountant is getting the same amount of wages. The professor is required to purchase books of his/her subject. On the other hand, the accountant need not to incur any such expenses. Therefore, the real wages of accountant would be more than that of the professor.

viii. Time and Cost Incurred on Training:

Acts as one of the important determinant of real wages. The professional courses, such as medical, engineering, and law, involves a large amount of money, time, and effort. Therefore, the real wages of individuals, who get employed after undergoing such courses, is determined by subtracting the expenses on education and training from their nominal wages.

ix. Employment of Dependents:

Affects the real wages of an individual. The dependents of an individual employed in the field of army, railways, and government banks, would get preference at the time of employment. In addition, he/she would also get extra benefits from the employer. As a result, their real wages are high.

x. Future Opportunities:

Refer to one of the most significant determinants of real wages. Real wages are generally high in case of jobs having more future opportunities as compared to jobs having less future opportunities.

xi. Social Status:

Implies that the social status of an individual directly affects the real wages of an individual. For example, the nominal wages of a head clerk in an agriculture department is same as the nominal wages of a police inspector, but the social status of inspector is more than the head clerk. Therefore, the real wages of the inspector are more than the head clerk.