# Real wages

Development of nominal and real wages in Germany
Change in nominal and real wages in Germany

The real wages or real wage index is in the economics , the ratio of nominal wage and price level or of nominal wage index and price index . It increases when the nominal wage rises faster than the price of goods. If the nominal wage rises more slowly than the price of goods, the real wage falls.

## Definitions

The nominal wage is defined as an average value. If it is understood as a net wage after taxes and social security contributions, changes in real wages indicate how the purchasing power of employees changes. If the nominal wage is understood as gross wage , then changes in real wages indicate whether work is becoming more expensive or cheaper from the company's point of view. This second definition prevails in economics.

### Real wage index

The Federal Statistical Office calculates a real wage index for Germany. The real wage index is calculated as the quotient of the nominal wage index and the consumer price index.

${\ displaystyle {\ text {Real wage index}} = {\ frac {\ text {Nominal wage index}} {\ text {Consumer price index}}} \ cdot 100}$

Changes in this index roughly correspond to the change in nominal wages minus the inflation rate.

### Real wages

The real wage is expressed in the ratio of the wage rate W to the price level P :

${\ displaystyle R = {\ frac {W} {P}}}$

The factor W (wages) represents the aggregated nominal wage . The aggregated nominal wage is the average gross hourly wages measured in monetary units .

The factor P corresponds to the price level , i.e. the average price of the goods.

In neoclassical theory , real wages are closely related to the marginal product of labor . A company in competition thus hires workers until the marginal product of labor matches real wages.

For consumers - this can be employees as well as companies - the real wage is decisive, not the nominal wage. The workers' interest is how many goods and services they can actually buy, not how many euros they get at the end of the month. The decisive factor is the amount of the wage in the form of units of goods, the so-called real wage.

Looking at the companies, it is not the nominal wage paid to the employees that is decisive, but what nominal wage the companies pay in relation to the price of the end product produced. Here, too, the real wage is the decisive component.

## Development in the Eurozone

Real wages in the euro area

The graph shows the development of real wages in the euro zone. According to this, real wages in Spain, Ireland, Italy and France have risen significantly since the introduction of the euro, while there have been only minor changes in Germany and Portugal and real wages in Greece have even fallen in recent years.

## Real wage and unemployment rate

Wage and price setting affect the unemployment rate, with the assumption that the actual price levels P to the expected price level P e corresponds.

Wage setting equation :

${\ displaystyle {\ frac {W} {P}} = F (u, z)}$

The wage setting includes a negative relationship between the unemployment rate u and the real wage W / P , that is, the higher the unemployment rate, the lower the real wage, which is set when the wage is set. If the unemployment rate rises, the bargaining power of the employees is worse and the real wage is lower. However, this does not yet result in a compelling causal relationship. Rather, both unemployment and real wages are dependent on the aggregate demand for labor.

Pricing equation :

${\ displaystyle {\ frac {P} {W}} = 1+ \ mu}$

The reciprocal value gives the equation for the real wage:

${\ displaystyle {\ frac {W} {P}} = {\ frac {1} {1+ \ mu}}}$

With

${\ displaystyle \ mu}$ = Profit premium

The equation shows that companies' choice of how to set their prices has an impact on real wages. A higher profit mark-up causes companies to raise their prices for given nominal wages. This in turn causes a decline in real wages at the same time.

## literature

• Olivier Blanchard, Gerhard Illing: Macroeconomics , 3rd edition, Munich: Pearson Studium, 2004.
• Silver Compact Line: Large dictionary of economics. Basic knowledge from A to Z , Munich: Compact Verlag, 2004.