What is the difference between nominal and real wages?

Salary is the result of hours worked, remuneration for work in monetary terms. It is this characteristic of the salary that article 136 of the Labor Code of the Russian Federation gives. General economic theory divides wages into real and nominal. In this article, we will analyze each of the concepts in detail and define the difference between them.

The nominal wage is the amount that the worker actually receives as payment for his work. It is this amount that is indicated in the payroll. The concept of nominal wages is not regulated by legislation, but it exists and is quite widespread.

The real wage is the quantity of goods that can be bought with the wage received.

Often, an employee can afford to buy goods for a nominal salary several times less than a few months ago. Thus, real wages are an indicator of the well-being of stable developing countries.

Nominal wage parameters

So, with the concept of nominal wages dealt with above. It remains only to add that its size directly depends on the labor produced.

Elements of wages that form the nominal profit of an employee with various forms of remuneration:

• rate, salary, working hours (number in hours, days);
• the significance of the task performed or the number of units produced;
• summary data on the length of time worked and the implementation of the quality standard;
• the size of the actual value within the boundaries of the period fixed by the schedule.

Each of the listed configurations has its own indicators that affect the value of the RFP. Many enterprises practice additional motivation and incentives for better / faster completion of tasks: bonuses, which are applied to all forms of payment based on the results of the month, quarter or year.

As mentioned earlier, the degree of real wages is an indicator of economic growth and the welfare of the country.

Characteristics of the parameters affecting the size of real wages:

Partly balances the distortion of market processes by the intervention of the state. Economic and social methods of influence are applied through legislative and controlling spheres of influence.

Similarities and differences between nominal and real wages

Common features:

1. Both are representatives of wages.
2. Presented in monetary terms and the currency in which the employer makes payments.
3. Their size is not equal due to deductions to the state in the form of taxes that must be made by the employer.

The main difference between nominal (accrued) and real wages is that nominal income, unlike real income, has nothing to do with the well-being of workers and does not reflect their purchasing power.

Based on the foregoing, it is obvious that it is the size of the real salary that is responsible for the material security of the employee.

The direct co-dependence of real wages on nominal wages is especially clearly seen in a situation where the level of nominal wages is growing faster than inflation.

For example, the amount of accrued wages increased by 17% percent, while the inflation rate was 7%. It turns out that real wages (purchasing power) increased by 9.34%. That is, an employee can afford goods and services by 9.34% more than in the previous year (month, quarter).

The reverse situation shows the dependence no less clearly. Salary growth is slower than the rate of inflation - the story is often met. Let's consider it in more detail.

For example, nominal wages increased by 40%, while inflation was 45%. It turns out that the size of real wages has become lower by 2.33%. In other words, an employee with such data, despite a significant (in numbers) increase in nominal wages, will be able to purchase goods and services by 2.33% less. That is, the standard of living of such an employee has become lower.

Applicability of the concepts of real and nominal wages

The terms under consideration cannot be found in any of the codes of the Russian Federation. Their existence is limited to general economic theory and directly relates to statistical data.

The very concept of "wage" can be explained using the following theses:

• remuneration for the performance of tasks, presented in monetary terms;
• the cost of the time of each individual specialist;
• the costs of the enterprise for the wages of hired workers.

The state monitors that wages do not fall below the minimum established by law.

Conclusion

From the foregoing, the following conclusions can be drawn:

1. Nominal and real wages have different values, but are closely related.
2. The concepts of accrued and real wages exist only in general economic theory and are used in statistical studies.
3. For purchasing power, real, not nominal, wages matter.

Simply put, the number on your payslip is not so important, it is important that you can buy for this amount.