Nominal minus inflation
Real wages: nominal pay vs. purchasing power
Real income is nominal wages adjusted for inflation. A 4% raise during 3% inflation is a real raise of about 1%; a 3% raise during 5% inflation is actually a 2% pay cut. US median real wages have grown only modestly since 1980 despite significant nominal gains. Always evaluate compensation offers in real terms relative to local cost-of-living.
Level
Try calculatorKey takeaways
04 · ideas- Real wage = nominal wage adjusted for inflation
- If salary rises 3% but inflation is 5%, real wage fell about 2%
- BLS publishes real earnings data monthly
- Purchasing power parity allows income comparisons across countries
Nominal wages are wages measured in current dollars. Real wages adjust for inflation, measuring purchasing power instead.
If your salary is $60,000 in 2020 and $63,000 in 2023, that is a 5% nominal increase. But if consumer prices rose 15% over that period, your real wage fell — you can purchase less with the 2023 salary.
$$\text{Real wage change} \approx \text{Nominal wage change} - \text{Inflation rate}$$
A 5% raise when inflation is 5% means approximately 0% real increase. A 3% raise when inflation is 7% means approximately a 4% real wage reduction.