Cached
Distinguish Between Money Wage And Real Wage Definition

What is the difference between nominal and real wages?

The nominal wage rate is the average hourly wage rate measured in current dollars and the real wage rate is the average hourly wage rate measured in dollars of a given reference base year. Real wage rate by FSCJ is licensed under CC-BY-4.0. The real wage rate is the. Jul 22, 2020 Real wages are the type of wages that consider inflation rates. The wages will reveal the purchasing power that a person holds and the amount of goods or services the person can acquire, given the current market conditions.

Nominal Wages:

Wages measured in money.

Real Wages:

Wages measured not in terms of money itself (as nominal wages are) but rather in terms of how much output that money can buy.

Or

Nominal Wage:

By nominal wage is meant the total amount of money earned by a person during a certain period. For instance one employs a servant and pays him Rs. 2600 per month for the services he renders to him. The amount which is paid in terms of money only is named as normal wages.

Real Wages:

Real wages refer to the total amount of satisfaction which a worker receives in the form of necessities, comforts and luxuries in return for the services. Real wages generally include money wages and other facilities like free clothing, free housing, free accommodation, free electricity etc. If we are to judge the standard of living of the masses it can be estimated not from the nominal wages of the workers but from the real wages. In other words of Adam Smith, the labor is rich or poor, is well or ill rewarded in proportion to the real not nominal wages of the labor.

We take a closer look at the connections between wages, prices, and economic activity. We find that causal relationships between wages and prices are difficult to identify, and the ability of wages to help predict future inflation is limited. Wages appear to be useful in assessing the current state of labor markets, but they are not necessarily sufficient for thinking about where the economy and inflation are going.

Labor costs and labor compensation have garnered considerable attention from economists in the wake of the financial crisis and recession. Across a range of measures, wage growth slowed sharply during the recession. Recently, wage growth has remained near historically low levels despite improvements in the labor market.

Subdued wage growth has been variously seen as both a cause and a consequence of the slow pace of economic growth and persistently low inflation rates. It also may have contributed to rising inequality. In some forecast narratives, a pickup in wage growth is viewed as a necessary condition for a stronger recovery and rising inflation. In others, it is a natural consequence of a tightening labor market.

This Commentary takes a closer look at the relationships between wages, prices, and economic activity. It finds that the connections among wages, prices, and economic activity are more akin to a tangled web than a straight line. In the United States, wages and prices have tended to move together, and causal relationships are difficult to identify. We do find that wages are sensitive to economic activity and the level of slack in the economy, but our forecasting results suggest that the ability of wages to help predict future inflation is limited. Thus, wages appear to be useful in assessing the current state of labor markets, but not necessarily sufficient for thinking about where the economy and inflation are going.

“Wage” Measures

There are a variety of ways to measure labor compensation and labor costs. Our analysis focuses on three such measures. While these measures have varying coverage, we will generically refer to them as “wages.”¹

Average hourly earnings (AHE) of production and nonsupervisory employees on private nonfarm payrolls. This measure is perhaps the closest of our measures to the concept of wages.
Compensation per hour (CPH) in the nonfarm business sector. This broader measure of compensation includes not only wages but also bonuses and benefits.
The Employment Cost Index (ECI)—in particular, we use the ECI measuring compensation of private industry workers. The ECI captures wages, salaries, and benefit costs. The ECI abstracts from changes in the sectoral composition of employment over the business cycle, preventing some of the composition bias that affects other wage measures (see Fee and Schweitzer 2011).²

Measures of wage inflation have similar trends, but important differences arise (figure 1). Compensation per hour is notably more volatile than the other wage measures, even when looking at year-over-year growth rates. Abstracting from this volatility, all three wage measures decelerated during the recession, and nominal wage growth has been near 2 percent since the end of the recession—which is quite low by historical standards, and just ahead of inflation during that time. When viewed over a long time span, the upturn in average hourly earnings growth since mid-2012 and the acceleration in the ECI in the second quarter of 2014 are very small.

Cross-Correlations

We first consider the connections between wages and inflation or economic activity using cross-correlations. Cross-correlations allow for a simple examination of the lead or lag structure between two series as well as the strength of the connections between the series. If wage inflation reliably comes ahead of price inflation in the data, then the strongest cross-correlation should be between wage inflation in quarter t and price inflation in some k-th quarter after t.

When working with price inflation and wage inflation, there are important long-run trends and short-term volatility that we would like to remove from our analysis. As a general rule, wages and prices have followed roughly similar long-term trends: both accelerated from the 1960s into the 1970s and then decelerated in the 1980s. The forecasting literature has found gains in inflation forecasting accuracy by specifying inflation in gap form as a deviation from a slow-moving long-run trend (see, e.g., Kozicki and Tinsley 2001, Clark 2011, and Zaman 2013). We borrow from this literature and construct wage inflation gaps as quarterly annualized growth in a particular wage measure less a shared long-run trend.³ To remove high-frequency fluctuations in food and energy prices in our measure of price inflation, we define the price inflation gap as quarterly annualized core PCE inflation less the shared long-term trend. We then look at cross-correlations between quarterly price inflation gaps at time t+k and quarterly wage inflation gaps at time t.

Our measures have been moderately positively correlated since 1960: both price inflation and wage inflation tend to be above (or below) trend at the same time (figure 2). The strongest correlations have been between core PCE inflation and the ECI. The weakest correlations have been with the CPH measure, which is not surprising given its volatility. Depending on the measure, wages either lead core PCE inflation very slightly or are contemporaneous with it: the correlation peaks come in quarter t+1 or t.

A large literature has identified changes in inflation dynamics since the mid-1980s. If we compute cross-correlations only on the basis of post-1984 data, the results are uniformly weaker (figure 3). The ECI continues to have some of the strongest correlations, especially the contemporaneous relationship between the ECI and core PCE inflation. In this shorter time period, average hourly earnings tend to lag core inflation very slightly: the strongest correlation is between core inflation one quarter in the past (quarter t−1) and AHE inflation today (quarter t).

We can compute similar cross-correlations between a measure of economic activity—for simplicity, we use the Congressional Budget Office’s estimate of the natural rate of unemployment to derive an unemployment gap—and our price and wage inflation gaps. Given that Phillips curves typically relate inflation to economic activity, these cross-correlations are thus one indication of any Phillips curve–like relationships and their timing (figure 4: solid lines show cross-correlations using data from 1960 onward, and dotted lines show cross-correlations using data from 1984 onward). The correlations are negative, consistent with elevated unemployment putting downward pressure on wage and price inflation.

Cached

In terms of timing, unemployment gaps tend to lead price a

Distinguish Between Money Wage And Real Wage