REAL WAGES, MONEY WAGES AND THE TERMS OF TRADE. REAL WAGES, MONEY WAGES AND THE TERMS OF TRADE. Pitchford, J. 1963-09-01 00:00:00 Footnotes 1 J. Russell, “Wage Rates, the Cost of Living and the Balance of Payments”, Economic Record, April 1957, p. 2 This question can involve us in the complication of deciding on the nature of wage earners. Money Wage synonyms, Money Wage pronunciation, Money Wage translation, English dictionary definition of Money Wage. Pl n economics wages evaluated with reference to the money paid rather than the equivalent purchasing power.

The real wage doesn't show how many dollars a worke ris paid for an hour of work (that's nominal wage) but rather the purchasing power of that money The term real wages refers to wages that have been adjusted for inflation, or, equivalently, wages in terms of the amount of goods and services that can be bought.

The Market for Labor

Suppose we have the following information about the market for labor:

Demand for labor: w = 10 - 2L
Supply of labor: w = 1 + 3L

Define Money Wage And Real Wage

where L = hundreds of thousands of hours per week
w = real wage in dollars per hour, base year dollars.

Solving for the equilibrium real wage and level of employment, we get:

Demand = Supply

10 - 2L = 1 + 3L

Free money for raging bull casino. 9 = 5L

Equilibrium L = 1.8
Equlibrium w = $5.40

We can see this equilibrium in Figure 1:

FIGURE 1

According to this equilibrium, at a real wage of $5.40 per hour, employment is 180,000 hours of labor per week.

The demand for labor depends on the hiring rule used by profit maximizing firms. In the simplest case,
the perfectly competitive case, firms hire labor until the real wage equals the marginal physical product of labor:

Hiring rule: w = MPP where MPP = [change in output/change in units of labor]
w = the real wage = W/P or the money wage divided by the price level.

Also, we assume that, in the short run, the marginal physical product of labor is positive but decreaseing.
Therefore, as a firm hires more labor, each additional unit of labor hired generates a smaller increase in output
than the unit of labor hired before it.

The supply of labor is determined by the willingness and ability of individuals to offer their efforts to the market. Increases in the real wage will create a higher quantity of labor supplied; higher real wages mean that the opportunity cost of not working has risen. But, the supply curve will shift if other factors, such as the labor force participation rate, change. Changes in the labor force participation rate can come about due to changes in social attitudes, changes in the working age population, changes in expectations about future income, etc.

Once equilibrium is reached, as in the example above, there is no reason for the market to move from that equilibrium unless either the demand for labor or the supply of labor shifts.

Let the Figure 2 below depict the market for labor in the economy.

FIGURE 2

At point E, we have the equilibrium real wage w(E), and the equilibrium level of employment L(E).
At the wage w(E), firms are hiring labor so that the Marginal Physical Product of labor is equal to the real wage.
There is no reason for this equilibrium to change unless either the demand or the supply curve of labor shifts.
Let's assume that L(E) is the level of employment that generates the long-run equilibrium level of real GDP, or the
Potential real GDP. Therefore, in Figure 3 below, point E, the long-run equilibrium, has a real wage of w(E) and
employment of L(E).

FIGURE 3

Now, suppose impovements in our education system make labor of all kinds more productive. At every value of the real wage, the marginal physical product of labor increases. This shifts the demand curve for labor out to the right, as seen in Figure 4. This means that at the current real wage, w(E), employers are willing and able to hire more labor than L(E). There is an excess demand for labor at w(E), so the real wage will be bid up to w(G), and employment will rise to L(G).

FIGURE 4

But, this change in the equilibrium real wage, due to educational improvement, means that the ability of the economy to produce goods has improved. If the education change is permanent, then both the short-run aggregate supply curve and the long-run aggregate supply curve will shift to the right, as shown in Figure 5. The permanent improvement in the productivity of labor, brought about by educational improvement, has lead to an increase in Potential real GDP, even though the real wage is higher than w(E). The increased productivity of labor has lead to a positive supply shock. The new short-run equilibrium will be point F. If aggregate demand is held constant, following neutral policies, then the new long-run equilibrium will be at point G. The real wage would be w(G), as in Figure 4. Potential real GDP will be higher, due to the increased employment we see in Figure 4, L(G). The increase in employment from L(E) to L(G) has lead to the increase in Potential real GDP.

FIGURE 5

Learn about the comparison between Money Wages and Real Wages to Labourer.

What the labourer earns by working in a factory or office is called wages. The labourers are generally paid a certain sum of money per day or week, etc. The amount of money paid is called the money wages.

The worker, however, is more interested in the goods and services which he can get with his money wages or otherwise. The amount of goods and services which the labourer actually gets is called his real wages. The standard of living and the prosperity of a labourer depend not on his money wages but on his real wages.

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Real wages depend upon the following factors:

1.The Price Level:

The labourer uses his money wages to purchase his requirements. The amount of goods and services that he can get depends on the level of prices.

2. The Extra Earnings:

It is possible for labourers to get extra earnings. For example, waiters in hotels get tips which supplement their wages. Sometimes labourers are given food and lodging either free or at a reduced rate. Such things must be counted as part of their real wages.

Sometimes a labourer has to incur some costs in carrying out his duties. For example, a day labourer has to incur transportation Cost when going to his place of duty. Such cost must be deducted from his money wages when calculating his real earnings.

A major problem connected with wages is the apparent discrepancies which often exist in the payments of workers in various occupations. For example, a worker living in an area where the cost of living is high will find his pay packet of less real value to him than the worker earning the same amount of money but residing in a cheaper area.

Money Wage Rate Vs Real Wage Rate

Thus it may be necessary to pay higher wages to persons employed in Calcutta than to those in Burdwan or Bandel, although the ‘real’ value of the wages of the Calcutta worker, in terms of what the wages will buy, will be no higher.

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Calculate Real Wage Rate

Wages also differ due to a number of factors. Hence, comparison of wages may thus involve taking into account such factors as subsidized housing, pension rights, family allowances, expense sheet allowances and the use of company cars.

Real Wages Chart

These extra payments will, of necessity, have to be taken into account along with such other factors as security against unemployment, long term promotion prospects and the job-satisfaction of the work itself. All these add up to make ‘real wages’ of a job very different, in many cases from ‘money wages’.

Money Wage Real Wage