Question

Workers are negotiating their wages and the current expected inflation rate is 5%. Under what circumstances workers would experience an increase in their purchasing power at the end of the negotiations?

Answer 1

Economists have distinguished between real wages & nominal wages. Nominal wages are the pay obtianed by an employee in the form of currency.

Thus, it is also called money wages. For instance, an employee gets $ 200 from his company in exchange of services provided by him.

In this situation, the amount of $ 200 is considered as a money wage. On the contrary, real wages are defined as the quantity of commodities that an employee buys from his nominal wages. Thus, real earnings are the purchasing power of money wages.

Suppose a laborer earns $ 100 per day & his wages are augmented to $ 120. In such a circumstance, its not necessary that his economic condition / his purchasing power will escalate.

The economic condition of a laborer depends upon the amount of commodities he can buy with nominal wages. In case, the prices of commodities are doubled, the laborer would need the double amount of his nominal wages what he’s getting presently to buy goods . Thus, the economic condition of a person is ascertained by his real wages.

Real wage= (Nominal Wage/Price level) * 100

Workers would experience a rise in their purchasing power if nominal wages are increased more than 5%