Difference between nominal and real wages and factors of real wages

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 labour is rich or poor, is well or ill rewarded in proportion to the real not nominal wages of the labour.

Factors for Determining Real Wages

If we are to determine the real wages of a labour the following factors are to be taken into consideration

(i) Purchasing Power of Money: The purchasing power of money does not remain the same. It continues fluctuating from time to time. When the prices of the commodities go up, the purchasing power of money falls and when the prices fall, the purchasing power of money rises. The real wages of a labour depend upon the purchasing power of money. If the nominal wages are quite high and prices are low, then we can say that the real wages of labour are high but in case the cost of living is high, then the real wages will be low. Thus we conclude that other things remaining the same, the higher the cost of living, the lower the real wages and vice versa.

(ii) Opportunity of Extra Earning: If a person has an opportunity of earning extra income in a certain occupation, than his real wages will be higher then the one who does not have. For instance a Professor can increase his income by writing books, contributing articles of journals, newspapers etc but a superintendent working in are office does not have opportunity for supplementing his income. So his real wages will be low as compared to professor’s income even if both are getting the same salary.

(iii) Nature of Work: In computing real wages, we have to take into consideration the nature of work also. If the work is pleasant and agreeable then real wages will be high, even if the nominal wages are low. For instance Rashid is working as a pilot in the PAF and is getting Rs. 50,000 per month. Another man Hamid is magistrate and is receiving Rs. 20,000 monthly. There is no doubt that Rashid’s nominal wage is higher but his duty is of such a nature that his life is always in danger. On the other hand the duty of the magistrate is pleasant and has a social status. So we can say that the real wage of the magistrate is high because his work is pleasant while that of the pilot is low because his work is risky.

(iv) Future Prospects: The prospects of success in the future also play a dominant role in determining the real wage of a person. If in a certain occupation, the chance of future prospects are dark, then the real wage of that man who is working in such occupation is lower than the one who is getting low wages in a certain job but his chances of getting promotion in the future are certain and bright.

(v) Hours of Work: When we are to measure the real wages of two different persons earning the same amount, the number of working hours should also be taken into account. For instance if a worker receives Rs. 5000 monthly by working four hours a day and the other 8 hours a day. The real wage of the former will be higher than the later.

(vi) Tenure of Service: Employments are of two types; permanent and seasonal. If a person is engaged in a work which is regular and permanent then the other things remaining the same, his real wages will be higher than the one who is working in a seasonal occupation.

(vii) Form of Payment: While determining the real wages of a labour, the form of payment should also be taken into consideration. If a labour is receiving Rs. 6000 monthly and there is no extra payment in kind such as clothing, food, shelter etc then his real wages will be lower than the one who earns Rs. 5000 monthly and also receives additional facilities in kind.

(viii) Expenses of Trainings: Expenses of training are also one of the very important elements in determining the real wages of a labour. For instance the nominal wages of two labourers are the same but their period and the cost of training differ. One labour has spent 16 years of his life in getting education and has spent Rs. 10 lacs. The cost and the period of training of the other labour is Rs. 40,000 and two years only. It is quite evident that the real wages of the later are higher than that of the former.

(ix) Social Status: Real wages also depend upon social status. The money wages of magistrate and a professor may be equal but the former’s position is held in great social esteem in this country. So we ca say that real wages of the magistrate are higher then the professor’s.