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Real wages

Updated: Aug 20, 2021

A wage rate will normally be expressed in money units per unit of time, e.g. £50 per week, £2,600 per year, etc. However, we may be interested in knowing the purchasing power which a given money wage implies, and so we define the real wage as the money wage divided by an index number of an overall price level. If money wages rose by 5 per cent while the price level also rose by 5 per cent, the real wage would remain unchanged, implying that the volume of goods and services which can be bought with the new money wage is equal to that which could be bought with the old. Note that ‘real’ is used as the opposite of monetary, not the opposite of imaginary.

Reference: The Penguin Business Dictionary, 3rd edt.

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