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.
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