Here is a small puzzle. In 2010 the typical American worker took home $746 a week. A year later it was $756. The pay rose, and yet the person holding the envelope may well have been no better off. Everything turns on what the money can buy.
Two ways to read the same number
The nominal wage is the plain sum of money received for work in a given period, in whatever currency the economy uses. Pesos, dollars, rupees. It says nothing about prices. The real wage does: it is the nominal wage measured against the cost of living, a statement of how many goods and services the pay will actually fetch. Your nominal wage depends on the currency, as the CORE Econ textbook puts it, while your real wage does not.
Economists track the two with index numbers. Pick a base year, call it 100, and measure everything against it. In the US example the textbook uses, wages in 2011 rose from $746 to $756, a 1.3% increase, so the index stood at 101.3. The next year’s $768 was a 1.6% rise and moved it to 102.9. Prices get the same treatment through the consumer price index, which follows the cost of a shopping basket of food, utilities, rent, healthcare, education and the like. Divide the wage index by the price index, multiply by 100, and you have the real wage index.
What it looked like in Europe
The method matters most when prices run ahead of pay. The European Commission’s 2023 review of labour markets shows it clearly. Across the EU, wages per employee grew in real terms by 1.1% in 2021. Then 2022 flipped the picture, with most countries reporting negative growth and an overall EU decline of 3.7%. The sharpest year-on-year fall, 5.1%, was logged in 2022’s third quarter.
By spring 2023 (the second quarter) the damage had narrowed: real wages were down 0.8% on a year earlier, after a 3.4% drop in the first quarter. The cause was faster nominal wage growth combined with inflation that had been falling since November 2022. The spread across countries was wide. Romania led with 8.7%, while Czechia sat at the other end with a decrease of 4.7%.
Pay packets in these countries were, in most cases, bigger in nominal terms. They bought less.
Cushions and forecasts
Households did not take the full hit. Public transfers and tax reductions softened the blow, so that real gross disposable household income fell by only 0.4% in the last quarter of 2022. Pay trends alone had pulled it down by 2.2%. Most support came as untargeted price measures, mostly energy price caps and lower energy taxes.
The Commission’s spring 2023 forecast expected real wages to slip a further 0.8% in 2023, then recover 1.5% in 2024. Even so, they would sit almost 2.8% below their 2019 level.
Sources
- 1.4 Measuring the macroeconomy: Nominal wages, prices, and real wages – CORE Econ, The Economy 2.0
- Recent developments and prospects for real wages and purchasing power – European Commission, Labour market and wage developments in Europe 2023
