Real wage

The real wage is in the economics of wage that corresponds to the actual purchasing power, that is, the quantity of goods that can actually be purchased at a given cost of living with the nominal wage. The real wage is closely related to the standard of living. As a static size rather insignificant, the real wage is primarily used for comparison between periods ( real wages ) and economic development.

The real wage is closely related to the marginal product of labor. A company in competition is as long as a labor until the marginal product of labor coincides with the real wage.

Term

The real wage is reproduced in proportion wage rate W as price level P:

The factor W (English: Wages = salary / wages ) represents the aggregate nominal wage dar. The aggregate nominal wage is the amount set in monetary units average wage, ie the amount that will be paid at the end of the month to the account of the employee. This is dependent on three factors: the expected price level Pe, the unemployment rate u as well as other factors such

The factor P is the price level, ie the price of the goods.

Dependence of real wages on the price level

For consumers or workers but also for companies in the real wage is crucial, not the nominal wage.

The interest of workers is how many goods and services they can buy with their wages, do not get how many euros they receive at month end or. The crucial factor is the level of wages in the form of freight units, the so-called real wage. Looking at the company, it is not the nominal wage paid to the employee matters, but what the companies pay nominal wage relative to the price of the final product produced. Again, the real wage the decisive component.

Real wage and unemployment

Wage and price-setting influence the unemployment rate, with the assumption that the actual price level P corresponding to the expected price level Pe.

Wage-setting equation:

The wage-setting includes a negative relationship between unemployment and real wage u a W / P, that is, the higher the unemployment rate, the lower the real wage, which is priced at the wage-setting. Increases the unemployment rate, the bargaining power of workers is worse and the real wage is lower. However, results in even no compelling causal relationship. Rather, both unemployment and real wage dependent of the aggregate demand for labor.

Pricing equation:

Using inverse yields the equation for the real wage:

With

The equation shows that the decision of the company as they set their prices has an impact on the real wage. A higher profit margin causes the companies to increase their prices for given nominal wages. This in turn simultaneously causes a decrease in the real wage.

Historical Development

Although there were historically temporary and spatial differences in real wages in different societies, but a significant upward movement in the industrialized countries only began during the Industrial Revolution in the 19th century.

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