Real Wage Rate
Categories: Econ
See: Wage Rate. See: Real v. Nominal Prices.
Well, first...what's a fake wage rate? Eh, okay. There is no such thing, unless you’re talking about the one you daydream about. There is, however, a "nominal" wage rate.
Let’s say you get paid $15/hour for juggling ice cream cones at a theme park. That’s your nominal wage rate. Your family has been in the ice cream juggling business for many generations. Your great grandmother tells you she’s jealous, because she was only paid $1/hour when she was in her prime ice cream-juggling years. Grandma’s not wrong—that was her wage rate, but it was her nominal wage rate.
You explain, “But grandma, you’re talking about nominal wage rates. If you want to compare what each of us could actually buy with our money, you have to look at our real wage rates, which take inflation into account. Sure you were paid $1/hr, but ice cream was 20 cents a pop. Now ice cream costs $3 a pop. So my wage went up 15x, but so did the cost of ice cream, and the cost of everything else. At least you could afford a house, which means you were actually better off than I am now! Houses are more expensive in real terms now than they were when you were my age.”
Grandma says, “Stop shaming our family. We’re ice cream jugglers, not economists.”
Related or Semi-related Video
Econ: What are Wage Rates?5 Views
And finance Allah shmoop What are wage rates Oh all
right You probably think about wage rates as it relates
the compensation all the time When you pick a major
you check out the wage rates for the potential jobs
and then run screaming away as fast as you can
from majoring in English and history and philosophy When you
search for a job wage rates are among the first
things you look for right Quite simply a wage rate
represents the amount of money Ah worker gets paid per
unit of time and usually that unit is an hour
or well Maybe it's a yearly wage or a monthly
wage Some like that So you make twenty bucks an
hour Or maybe your deal with your employers is that
you get paid forty grand a year Well your wages
could also come in other varieties like some people make
a monthly wage or a weekly wage or a daily
wage right The point is that you earn a certain
amount for a certain amount of work performed in economic
terms The way Drake equates to the price of labor
It's Aki cost for any business So economists look att
the wage rate as Aki input to production Right Because
high wages mean the producers have to raise prices keep
the same profit margin So think about that From the
company's perspective it's a direct relation and productivity or how
productive they are in producing profits for shareholders You look
at it from the other side the cheaper the cost
to produce something the higher the productivity of that company
or at least the capital deployed in it Also the
wage rate impacts the amount that consumers have to spend
So the wage rate plays into consumer spending in the
economy as well and kind of tickles inflation there every
now and then right So they have tons of wages
and they're willing to spend that extra dollar on conveniences
like home delivered whoopee cushions Well yeah whoopee cushion delivery
Alright well like the price for anything else The price
for labor gets determined by market forces generally supply and
demand So the wage rate for any profession and set
by the supply of people willing and able to do
that job and by the need for that job to
be done all right in the subtext there is if
a job isn't really needed And like St Blowers and
it turns out the minimum wage is twenty eight dollars
an hour Well taxpayers probably happily live with leaves all
over their street rather than pay a fortune for people
to blow him off And I'll just wait for the
next windstorm right You don't really need that job but
no fireman you know you need them and a surgeon
in the hospital Yeah you need them Well the amount
of people are number of people who can do the
job represent the supply supply of Labour The need for
the job represent the demand for it That's why people
who design advanced algorithms for offshore tax optimized emerging market
bond trading make so much money It's a really hard
boring job You need to go to school for a
really long time probably speak a few languages and well
frankly not many people can get through all the rigorous
training to do that job Well extremely low supply and
demand is massive Right sky's the limit Well Meanwhile the
pay rate for side of the road windshield squeegee professionals
is very low Pretty much anyone with arms Khun do
it and no one is really looking to get it
done Economists also look att wage levels on a broad
scale looking at a national or societal level Think about
the price for labor like the price for it Well
pretty much anything else If there's a lot of labor
available prices will be lower at least notionally low If
labour is scarce prices will be higher Okay let's look
at a few historical examples Europe Just after the black
death people go months without taking a bath And well
if you get out of line you might get burned
as a witch Meanwhile somewhere between a third or half
the entire population just died of a disease that caused
the black bulb to grow throughout your groin Bottom line
thanks to the plague Well there were not many workers
around so wages skyrocketed changes so momentous that it basically
undermines feudalism forever Okay now the opposite example America In
the late eighteen hundreds immigrants are pouring in from Europe
Meanwhile agricultural efficiencies air making farm workers way less necessary
like machines do the work of ten workers So people
are moving from countries side There he is like that
into city side areas Well there's lots of labour available
and as a result wage rates are very low so
low that people can barely live on them They live
in these crowded tenement things or company towns Ah whole
political movement gets created Teo Try to make life better
for those workers toiling away Lawmakers passed the minimum wage
the eight hour work day child rights protection thing so
kids don't have to work all day and not go
to school And other protections happened to okay so let's
look at the demand side of the equation Fast forward
about a hundred years or sell America in the second
decade of the twenty first century Automation computers and robots
have taken over a lot of professions will Meanwhile cheap
shipping costs and improve communications make it possible to outsource
unskilled labor toe overseas locations like China There's not much
demand for certain kinds of workers in the U S
Till wages don't increase Even though consumption goes up We
don't need a CZ many American workers to produce more
stuff It's also important Keep in mind that the way
compensation takes place has changed over time In the robber
baron days of old Well Worker got his twenty five
cents for a fourteen hour day and then had to
fend for himself for pretty much everything else like socking
away money for retirement health care benefits and other things
like that Yeah well nowadays most companies offer a wide
range of benefits like cash salary But then it cost
the company more money to pay for health insurance and
awesome more money toe add for a one K contributions
and they give other perks and other add ons These
don't figure in tow wage rates but they do figure
into company labor costs to remember the next time some
government worker quotes you that they only make forty eight
grand a year asked them how much they get in
pension and health care and all that and it's likely
something like another fifteen or twenty grand a year so
they don't really make forty eight grand a year They
make more like sixty eight or seventy grand a year
and you can feel less sorry for Well the wage
rate can also be influenced by regulatory factors The most
obvious of these is the minimum wage Remember those slums
from one hundred years ago Well in order to avoid
those situations governments will often set a minimum wage A
business can't offer a wage legally below this level So
as of two thousand eighteen federal minimum wage was seven
and a quarter an hour But many areas have much
higher threshold For example Washington D C Has a minimum
wage of twelve fifty an hour while Washington State had
a floor on its hourly wage in eleven fifty Well
the impact of minimum wages aren't always predictable They raise
some people's overall wages above a living level But they
also encourage businesses Teo turn toward automation or just shrink
the workforce like think about a restaurant is barely breaking
even and now suddenly the minimum wage as fifteen percent
of labor costs And so instead of having ten workers
maybe they can get away with nine or eight And
they just put the ipads up at every table so
people can just order their dinner through clicking on their
iPad And they can fire a worker well Meanwhile changes
in wage rates impact other economic indicators as well Specifically
higher wages can feed into inflation as workers get paid
more cos look to make up the additional expense They
raise prices for customers which feeds the overall increase in
inflation And as a result an overall increase in wage
rates don't always equate to a one to one benefit
for workers if the higher wages lead to increased inflation
While the buying power of the increased income might not
be all it's cracked up to be another factor When
considering a wage while bonuses versus salary that's another thing
It's another structure Many jobs come with a base salary
which might be nominally pretty low but they come with
commissions or bonuses based on performance And those Khun B
Way more meaningful than the salary Well if you're looking
to become a gold two salesmen you might not get
a big guaranteed salary But wow the commissions can be
huge So as you think about your career in the
type of wage rates or wage structures you're looking for
remember it's not the money It's all about what that 00:08:22.203 --> [endTime] money can buy