Real and Money Wages: Living Standards

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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  1. Pingback: What is “money wages”? | For My Money-Skills for Business-Mean Business

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