Nominal (Money) and Real Wages

The nominal or money value of wages is expressed at current prices and is not adjusted for the effects of inflation. In contrast, the value of the wages or earnings that someone earns each year are expressed at constant prices and therefore have been adjusted to take into account price changes.

Consider the data chart above:

The data shows an index of Nominal (Money) and Real Average Earnings in UK Labour Market from January 2005 through to February 2017.

The base year for the calculation is 2015 because the average index value for 2015 = 100

Average earnings are made up of

• Basic pay
• Overtime payments
• Bonuses and other additions to pay from work

Notice how the nominal value of average earnings has been rising steadily each year, but when we take into account the fact that consumer prices have been rising as well, then the increase in real average earnings is very low indeed.

In fact over the period shown there has been barely any significant increase in average real earnings for people in work.

The chart shows average earnings so some occupations and industries will have seen above average rises in real pay whereas other jobs (such as civil servants whose pay has been frozen in nominal terms in recent years) will have suffered a fall in their real incomes.

It is important to make a distinction between the money value of someone's pay and the real (inflation-adjusted) value because changes in real incomes are significant when we assess changes in average living standards.