Wages: Meaning, Nominal and Real Wages

Wages are the reward earned by labour for its productive services — the price paid for physical or mental work rendered by a worker. It is essential, however, to distinguish between two different ways of measuring a worker's wage.

The nominal wage (or money wage) is simply the number of rupees a worker actually receives per period — say, per month — without any adjustment for what that money can buy. The real wage, by contrast, measures the worker's wage in terms of its PURCHASING POWER — how much of goods and services it can actually buy, once changes in the general price level are taken into account.

This distinction matters enormously in practice: a rise in the money (nominal) wage does NOT automatically mean the worker is better off. If prices rise by the same proportion as the wage, the worker's real wage — and hence their actual standard of living — stays exactly unchanged; if prices rise by MORE than the wage, the worker's real wage actually FALLS even though the rupee figure on their payslip has gone up.

Two standard explanations of how the wage rate itself gets determined are studied at this level:

• Demand and Supply theory of wages: exactly as with any other factor, the wage rate is determined at the level where the market demand for labour (from employers) equals the market supply of labour (from workers willing to work at that wage). …