Question

1. In the light of the results in this chapter, why do not workers sign their long-term contracts with the firms in real terms rather than nominal terms?

Answer 1

While the details of the chapter are not given, I am listing the following reasons why in general it is hard to have contracts in real terms than nominal terms-

• Nominal terms contracts are easy to make, track and understand for everyone. It is obviously easy to have a contract that gives a raise of lets say 10% a year in nominal terms. For real terms one must first see inflation each year and then adjust everything accordingly.
• Uncertainty- When making a contract in nominal terms, one is certain how much they are going to get year after year. Real terms are based on inflation, which will only be measured once the year ends, and hence add uncertainty into everything.
• Real terms have different meaning for everyone- Based on my consumption, inflation might be different for me. For example, if I have a big family and a big chunk of my salary is spent on foods, then my inflation would be very different from a person who is single and spends mostly on electronics. Food inflation and electronics inflation will be different every year. So we will actually end up having our salary grow at different rates.