What does Real Wages mean?
Real wages or real income is the amount of income received after wages have been adjusted for inflation. Real wages can also be deduced from the amount of services and good which can be purchased by a certain wage. The term is generally contrasted with what is called the nominal wage or the wage which is not adjusted for inflation.
Decreasing Real Wages
Real wages decrease as inflation increases, a symptom of too much money chasing too few goods. This is generally a result of a central bank printing too much money in order to monetize the nation's debt. The rapid increase in money supply causes currency to lose value against hard assets and foreign currencies.
Calculating your real wage and considerations for employment
If you want to understand how much you can really buy or what your real wage is it is a bit more complicated than multiplying your hourly wage times the numbers of hours you work each week. In fact, you will first need to calculate external costs of working, including commuting costs, transportation costs, and the time it takes for you to get to work. But what about other benefits you receive from work? Benefits such as retirement savings, paid vacations, and other benefits have to be considered and added back into the calculation.
Why does your real wage matter? Imagine you are considering moving to California from Texas or working an extra shift. Before making any employment decisions it makes sense to evaluate the hidden costs and benefits of the job which are not included in your wage.
Without the right considerations, calculations and a full understanding of calculating your real wage you could end up moving to a new job in California only to find the cost of living, transportation costs, and increased housing costs eliminated any additional income you received. In fact, in this example, unless your nominal wage increases dramatically, you may have less money to spend because your real wage actually decreased.