Wage Negotiations and Purchasing Power

In an economy with very low unemployment, a union successfully negotiates a 6% increase in nominal wages for its members. The union leaders and members based this negotiation on an expected inflation rate of 2% for the upcoming year. However, firms across the industry respond to the higher labor costs by raising their prices, leading to an actual inflation rate of 6% for that year. Which of the following statements best analyzes the outcome for the union members?

Real vs. Nominal Wage Outcomes

In a low-unemployment economy, if firms increase prices by the same percentage as a recently negotiated nominal wage increase, workers will be satisfied because their real wage has remained constant.