Nominal Wage vs. Real Wage: Definitions and Examples

Real vs Nominal Wages

What is real wage?

It is important to understand the difference between nominal wage and real wage because it allows you to determine how much a particular pay rate will support you in relation to the current value of goods and other living expenses. Here are some specific examples of how your understanding of nominal wage vs. real wage can benefit you:

What is nominal wage?

Nominal wage, or money wage, is the literal amount of money you get paid per hour or by salary. For example, if your employer pays you $12.00 an hour for your work, your nominal wage is $12.00. Similarly, if your employer pays you a salary of $48,000 a year, then your nominal wage would be $48,000.

Another way to define nominal wage is wages measured as current dollars. Current dollars refer to a persons income amount without considering how inflation rates will affect it.

Key differences between nominal wages and real wages

There are a few ways that nominal wage and real wage differ from one another. Here are some examples to help you gain a better understanding of each:

Influences on nominal wage vs. real wage

Time considerations for normal wage vs. real wage

Nominal wage focuses on the current dollar amount of an individuals income, without any other considerations relating to past, present or projected inflation rates or other economic factors. In contrast, an individual needs to use past, present and projected inflation data to determine the estimated real wage they receive.

Purposes of normal wage vs. real wage

Normal wage and real wage also differ in their purposes. The purpose of nominal wage is simply to provide an individual with an expected dollar amount they will receive for their work within a given time frame from an employer. In contrast, the purpose of real wage is to help individuals determine how a dollar amounts value changes in response to changing inflation rates. This further helps individuals determine what they can actually afford with their pay rate.

Methods for determining nominal wage vs. real wage

There is no method required to find the nominal wage because the nominal wage is considered the current dollar amount of ones pay. However, determining ones real wage requires an individual to apply figures to a formula and make calculations.

How to calculate real wage

To calculate your real wage salary

To calculate your annual salary in real wages, you can choose between three formula variations, but they all produce the same outcome. Here is how to calculate your real annual salary if your nominal salary is $40,000 and the inflation rate is 1.2%:

Real Income = Wages – (Wages x Inflation Rate)

Real Income = $40,000 – ($40,000 x 1.2%)

Real Income = $40,000 – (480)

Real Income = $40,000 – 480

Real Income = $39,520

Real Income = Wages / (1 + Inflation Rate)

Real Income = $40,000 / (1 + 1.2%)

Real Income = $40,000 / 1.012

Real Income = $39,525

Real Income = (1 – Inflation Rate) x Wages

Real Income = (1 – 1.2%) x $40,000

Real Income = (0.988) x $40,000

Real Income = $39,520

You may notice that the real income total in formula two varies slightly from the other real income totals from formula one and formula three. Still, each total comes out to around $39,520, so you can estimate that to be your real salary with the current inflation rate.

To calculate your real wage hourly rate

To calculate your hourly pay rate in real wages, you can use the same formulas and replace your annual salary with your hourly pay rate. Here is an example of how to calculate the real wage expectations for hourly pay if your pay rate is $15.00 per hour and the current inflation rate is 1.2%:

Formula one:

Real Hourly Wage = Hourly Wage – (Hourly Wage x Inflation Rate)

Real Hourly Wage = $15.00 – ($15.00 x 1.2%)

Real Hourly Wage = $15.00 – 0.18

Real Hourly Wage = $14.82

Formula two:

Real Hourly Wage = Hourly Wage / (1 + Inflation Rate)

Real Hourly Wage = $15.00 / (1 + 1.2%)

Real Hourly Wage = $15.00 / 1.012

Real Hourly Wage = $14.82

Formula three:

Real Hourly Wage = (1 – Inflation Rate) x Hourly Wage

Real Hourly Wage = (1 – 1.2%) x $15.00

Real Hourly Wage = 0.988 x $15.00

Real Hourly Wage = $14.82

Because of the currently low inflation rate, your real hourly wage doesnt differ much from your nominal wage.

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