Real wages are wages adjusted for inflation, which reflect the actual purchasing power of goods and services. Suppose an individual was paid $10 per hour in 1997 and $11 per hour in 1998. This increase in the nominal wage rate, wage in current dollars, is $1 per hour. This represents a 10 percent raise. If the cost of goods and services also increased by 10 percent in the same time period, the purchasing power of an hour's wages or the real wage rate did not increase. The worker could buy the same amount of goods in 1998 for $11 that he bought for $10 in 1997. On the other hand, if the cost of goods and services did not increase, the workers' purchasing power or real wage rate would have increased by 10 percent. An hour of work in 1998 then buys 10 percent more than an hour's work in 1997.
Workers are more concerned with their real wages than with their nominal or money wages. To calculate the real wage rate the nominal wage rate is divided by a price index. The price index used might be the consumer price index or the gross domestic product (GDP). Using the above example, say the price index rose 5 percent between 1997 and 1998. Using 1997 as the base year the price index would be 1.00 in 1997 and 1.05 in 1998. The real wage rate is W divided by P, where W is the nominal wage rate and P is price index. In 1997 $10 divided by 1 is $10, so the real wage rate is $10. In 1998 $11 divided by 1.05 is $10.48, so the real wage is $10.48. These calculations demonstrate adjustments for inflation yielding the real wage rate in constant dollars. Research indicates that the higher the real wage rates the larger the labor supply, house wealth, and consumption of goods and services. Economic indicators tied to consumption expenditures will be positive.
In the United States real wages in manufacturing doubled between 1910 and 1940, only to double again between 1940 and 1970. Although nominal wages rose steadily, beginning in 1973 real wages for manufacturing non-supervisory workers began a downward trend that continued into the 1990s.