How to Calculate a Real Wage
The real wage equals the nominal wage divided by the price index, times 100, which converts a paycheck into base-year purchasing power.
The Real Wage formula
Calculator
Deflate a paycheck by a price index to see what it is really worth, then compare it with a year earlier.
The dollar figure actually paid this period.
CPI for the same period, scaled so the base year equals 100.
The earlier paycheck you are comparing against.
CPI in the earlier period, on the same base year.
The paycheck buys what $22 bought in the base year, when the index stood at 100.
- Real wage a year earlier
- $24
- Change in real wage
- −$2
- Inflation over the year
- 20%
- Purchasing power
- Fell
In base-year dollars the earlier pay was worth $24, which is the figure to compare against.
Buying power moved −$2 an hour, which is −8.3% in real terms.
Nominal pay changed 10% while prices changed 20%, and the larger of those two wins.
Raises only lift buying power when they beat inflation, whatever the paycheck says.
How to calculate Real Wage, step by step
- 1Find the nominal wage. The dollar amount actually paid per hour, per week, or per year in the current period.
- 2Find the price index. Usually CPI for the same period, scaled so the base year equals 100.
- 3Divide and rescale. Real wage = (nominal wage ÷ price index) × 100, which restates the pay in base-year dollars.
- 4Compare across periods. Line up two real wages to see whether buying power rose or fell, since the nominal figure alone cannot tell you.
Worked example: Real Wage
A worker earns $30 per hour when CPI is 125, so the real wage = (30 ÷ 125) × 100 = $24 per hour in base-year dollars. The next year the nominal wage rises to $33 while CPI rises to 150, so the real wage = (33 ÷ 150) × 100 = $22: the paycheck grew but the buying power shrank.
Real Wage questions
What is the difference between a real wage and a nominal wage?
The nominal wage is the dollar figure on the paycheck; the real wage adjusts that figure for the price level, so it measures what the pay actually buys.
What happens to the real wage when inflation outruns raises?
The real wage falls. Purchasing power drops even though the nominal paycheck is bigger than it was.
Can you use any price index in the formula?
Yes, as long as it is scaled to 100 in its base year. CPI is standard for wages, while the GDP deflator is used for economy-wide output.
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