Real wage and material living standard will be treated as different terms for the same variable.
The real wage, however, is not the same as the money wage. The real wage is the access to goods and services given to a worker in exchange for their labour. A change in the level of money wages is one determinant of a change in the level of real wages. A change in the overall throughput rate is another determinant.
Real wages always change as the direct result of movements in other variables. Money wages always change as the result of conscious, deliberate human decision, taken as a human response to changes in other variables.
A change in money wages must effect some change in real wages because of its effect on the determinants of real wages. But a change in real wages does not change the money wage; only human responsive action can do that.
The change in real wages effected by a change in money wages may be in the same or the opposite direction to the money-wage change, and may be a greater or smaller percent change than that in the money wage.
The following points apply:
If only one person receives a higher money wage, then their real wage will increase in the same proportion, while having a negligible effect on that of others.
If a sizeable minority of workers gets a money wage increase, then their real wage may increase, but by a lesser percentage than that of the money wage increase; and the real-wage increase will be at the expense of the real wage of other workers.
If the whole work force receives a money wage increase, then, under certain conditions, everybody’s real wage can actually decrease.
As we pass from the case of one worker getting more money, to that of the whole work force getting higher money wages, the direct effect on real wages of having more money to spend becomes ever less important while the indirect effect on real wages, operating through the effect on the rates of throughput, inflation and interest rates, becomes ever more important.
A 10 percent increase in money wages does not guarantee a 10 percent increase in living standard. Under the ‘stagflationary’ conditions of the 1970’s, which could recur, in the more perfluent countries, it guarantees a drop in living standard.
The effect of a change in money wages is to change the proportionate flow of money through the economic organism. Depending on what those proportions were before the change, and on whether prevailing economic conditions had had time to reach an equilibrium with the state of those proportions, the effect on throughput may be to increase or decrease it.
Under the extreme deflationary conditions of the Great Depression of the 1930’s, diverting more money to the wages channel would have had, and did have when it was applied, the effect of increasing throughput and generating more jobs. This will be discussed more in the next post.
In general it could happen that a rise in money wages leads to a fall in real wages and, conversely, that a fall in money wages could increase real wages.
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Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons