Difference between nominal wages and real wages

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Nominal wages and real wages are variables that are regularly determined by the Federal Statistical Office and that also play an important role in collective bargaining, among other things. The difference lies in the inclusion of the price development.

Nominal and real wages

  • The nominal wage is the actual gross monthly income of an employee. For comparison purposes, the nominal wage increase is calculated based on the same period of the previous year or another base year. In most cases, average values ​​of specific industries, regions or the total population are determined.
  • The real wage is the price-adjusted gross monthly income. Here, too, the real wage increase or decrease is determined for comparisons, which results as the difference between the nominal wage increase and the rate of price increase. The difference to the nominal wage increase lies in the consideration of purchasing power development. Normally there is more or less strong inflation, which causes the general price level to rise and purchasing power to fall. But deflation, a permanent lowering of the price level, is also possible.

For the assessment of the income situation, the real wage development is more meaningful, because an increase in the nominal wage is devalued by inflation. This means that purchasing power does not develop in line with the increase in nominal wages. Real wages can even fall despite rising nominal wages if the nominal wage increase does not compensate for inflation.

The difference is illustrated by an example

Assume that the average gross monthly income in a certain industry was EUR 2,500 in the previous year and is EUR 2,550 in the current year. The inflation rate for the period under review is 1.5 percent.

  1. You calculate the nominal wage increase by multiplying the current value by 100, dividing by the previous year's value and subtracting 100 from it. In this case you will receive 2 percent.
    2. What is the real wage?

    If you want to measure the purchasing power of a person, then the pure net wage for it is ...

  2. The real wage increase results as the difference between the nominal wage increase and the inflation rate. Subtract 1.5 percent from 2 percent. The real wage has therefore increased by 0.5 percent compared to the previous year. Purchasing power has increased by 0.5 percent.
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