If a worker's nominal wage increases from one year to the next, their ability to purchase goods and services has necessarily improved.
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Figure 1.9: US Nominal Wage, Consumer Price, and Real Wage Indices (2010–2022)
Stable Real Wage When Nominal Wage Growth Equals Inflation (US, 2015)
Purchasing Power Scenario
An employee receives a 4% raise in their nominal wage over a year. During the same period, the overall price level increases by 6%. What is the approximate change in the employee's real wage?
Explaining Changes in Purchasing Power
If a worker's nominal wage increases from one year to the next, their ability to purchase goods and services has necessarily improved.