Copyright

Real Wage: Definition & Formula

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: The Multiplier Effect in Economics: Definition, Formula & Example

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:01 Definition of Real Wages
  • 1:00 Formula for Real Wages
  • 1:37 Example of Real Wage
  • 3:30 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Shawn Grimsley
Rising prices eat away at the value of your pay, and raises aren't always worth as much as you may think. In this lesson, you'll learn about real wages and how to calculate them. You'll also have a chance to take a short quiz after the lesson.

Definition of Real Wages

It's important to distinguish between nominal wages and real wages. If you are paid by the hour, you are paid a nominal wage, which is simply the amount of money that you earn per hour of labor. If you earn $20.00 per hour, your nominal wage is $20.00. However, the nominal wage really doesn't tell you what your purchasing power is because the nominal wage isn't adjusted for inflation, which is a rise in the general price level.

Your real wage, on the other hand, takes inflation into account. An increase in real wages occurs when wages rise more quickly than inflation. On the other hand, if real wages rise more slowly than inflation, then your real wages - your purchasing power - has declined. It's important for you to know your real wage to determine if an increase in your wage is actually increasing your wealth, simply keeping pace with rising costs, or worse, falling behind rising prices.

Formula for Real Wages

The formula to calculate a real wage is relatively simple. Let's see how we can do it with the consumer price index (CPI), which is readily available online from the U.S. Bureau of Labor and Statistics. The consumer price index is one of several indexes of consumer goods and services that keep track of changes in the price level. You can determine whether prices are rising or falling year over year by reviewing the numbers. You can use this formula, along with the CPI, to calculate real wages: Real Wage = (Old Wage * New CPI) / Old CPI

Example of Real Wage

Imagine that in 2010, your nominal wage was $18.00 per hour, and you received a two percent pay increase in 2011, making your nominal wage $18.36 per hour. The consumer price index for 2010, was 218.056 and in 2011 was 224.939. What was your real wage?

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account
Support