Nominal Wage | Real Wage | Meaning | Factors determining Real Wage

What is a Nominal Wage?

Nominal Wages refer to the wages paid in terms of money. This can be called money wages. The remuneration received by labour in cash is called money wage or nominal wage.

Wage - Nominal and Real Wage

Wage – Nominal and Real Wage

What is a Real Wage?

Real wage indicates the exact benefit that would accrue to labour through the remuneration he gets. Real wage indicates the facilities which a labour enjoys by working at a job. The purchasing power of money determines the real wage of worker to a large extent.

Factor determining real wage of Worker

Let us discuss about the factors determining the real wage of a worker in detail.

1. Purchasing Power of Money

Real wage may be less while nominal or money wage is high. This depends on the purchasing power of the money. Purchasing capacity will change with the rise and fall in value of money. The changed price-level and index number will indicate the exact purchasing power of money.

It is evident that compared to 1950, the money wage at present has gone up many times while the real wage hasn’t due to poor purchasing power of money and inflation. Cost and Standard of living differ from place to place. When compared to rural areas, the real wage in metropolitan cities may be far less than the money wage.

2. Method of Payment

If wages are paid entirely in cash it is money wage. If a part of it is paid in kind, the laborer is paid real wages. In many agricultural labour, the afternoon lunch or meals would form part of the wages to be paid to the worker. In such cases the labour gets real wage.

Any benefit extended by non-monetary methods, forming part of wage is a real wage earned by the worker. Real earning of a worker constitutes provision for food, clothing and accommodation. All these aspects has to be taken into account by the wage earner while selecting a job.

3. Subsidiary Earning

To find out the real earnings or real wage of the worker, we have to take into consideration any extra earning in that work.

For example

  • a professor can make extra income from tuition work
  • a labourer in a vegetable market may get free supply of vegetables for him
  • a textile mill worker may get his clothing free of cost.

These are all considered subsidiary earning which should also be taken into account while calculating the real wage of worker.

4. Nature of Employment

The nature of employment decides the real wage to the worker. Some employments are of a routine nature while others will be more exacting and tiresome. Example: The job of an engine driver and labourer in mines. In some cases the worker will be expected to do extra work without remuneration. In these cases, the real wage will not be proportional to the nominal wage.

5. Regularity of Employment

Regular work with low payment will be preferred to irregular work with high wages. In comparing real earnings of the worker, due allowances must be made for differences in the permanency and regularity of the work. If there is an element of uncertainty, the real wage is considered less as there may be eventualities of remaining unemployed.

6. Future prospects

The future prospects of the job such as promotion which will fetch a higher wage may inspire a worker to accept low wage for the current position in the job. So during comparison of two employees with higher and lower wage respectively, the value attached thereto should be considered. The real wage of the latter may be considered high.

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