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Nominal Wage: Definition & Overview

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  • 0:01 What Is a Nominal Wage?
  • 0:25 Nominal Wages & Inflation
  • 1:07 Reaction to Declining…
  • 2:39 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Just because you received a raise, it doesn't mean you have more purchasing power. In this lesson, you'll learn about nominal wages and related concepts.

What Is a Nominal Wage?

A nominal wage is the rate of pay employees are compensated. If you're paid $15.00 per hour, your nominal wage is $15.00 per hour. The most important thing to know about a nominal wage is that it is not adjusted for inflation. Inflation is an increase in the general price level in an economy. Money wages is another term used by some people for nominal wages.

Nominal Wages and Inflation

Since a nominal wage is not adjusted for inflation, it does not accurately reflect the purchasing power your wage provides you. In the simplest terms, prices usually rise, and a dollar today is worth more than the same dollar tomorrow. The same is true of nominal wages.

If the wage rate doesn't keep up with inflation, your wages can't buy as much. In fact, even if you receive a raise in your wage, if the percentage increase in your wage is lower than the percentage of inflation, then you still have less earning power than you did the year before you got the raise. In order to see the effect of inflation on wages, you need to determine the real wage, which is the wage rate adjusted for inflation.

Reaction to Declining Nominal Wages

Wages are like any other good and are subject to the law of supply and demand. If the demand for labor decreases and the supply stays the same or increases, the nominal wage offered by employers in exchange for labor decreases. On the other hand, if the demand for labor increases, but supply stays the same or decreases, then the wage demanded by potential employees will increase. Nominal wages stabilize where the supply of labor equals the demand for the labor.

Economists vary on how they perceive people's reaction to a decrease in nominal wages. Economists of the classical school of thought assume that individuals are completely rational and will respond to changes in the real value of wages rather than the nominal value. Under this theory, a pay decrease will not necessarily be considered a bad thing so long as your purchasing power stays the same.

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