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On the basis of form, wages are of two kinds:

  • Nominal wages.
  • Real wages.

(1) Nominal Wages – Definition and Example:

By ‘nominal wage’ is meant the total amount of money earned by a person during a certain period.

For example, you employ a servant and pay him $2600 per month for the services he renders to you. The amount which is paid in terms of money only is named as nominal wages.

(2) Real Wages – Definition and Example:

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.

For example, 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 then real wages.

In the words of Adam Smith, the labor is rich or poor, is well or ill, rewarded in proportion to the real, not the nominal wages of the labor.

Factors of Determining Real Wages:

If we are to estimate the real wages of a labor, 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 labor depend upon the purchasing power of money.

If the nominal wages are quite high in a country, it cannot be said that real wages would also be high. Real wages depend upon the purchasing power of money. If nominal wages are high and prices are low, then we can say that the real wages of the labor 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, then his real wages will be higher than the one who does not have. For example, a professor can increase his income by writing books, contributing articles of journals, newspaper, etc., but a superintendent working in an 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 normal wages are low. For example, James is working as a pilot in the US Air Force and is getting $50,000 per month. Another man, Lara, is a magistrate and is receiving $20,000 monthly. There is no doubt that James’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 example, if a worker receives $5,000 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 Services. Employments are of two types, permanent and seasonal. If a person is engaged in a work which is regular and permanent, then 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 labor, the form of payment should also be taken into consideration. If a labor is receiving $6,000 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 $ 5,000 monthly and also receives additional facilities in kind.

(viii) Expenses of Training. Expenses of training ate also one of the very important element in determining the real wages of a labor. For example, the nominal wages of two laborers are the same, but their period and the cost of training differ. One labor has spent 16 years of his life in getting education and has spent $10 lac. The cost and the period of training of the other labor is $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 a magistrate and a professor may be equal but the farmer’s position is held in great social esteem in Pakistan. So. we can say that real wages of the magistrate are higher than the professor’s in Pakistan.