When we look for a job one of the issues that we usually take into account is the salary; As it is sought that this is in accordance with the time invested, and the actions carried out, also taking into account the ability of the individual to perform the work in an efficient way and that benefits the economy of the company. Now, how much is our time really worth? How much money do we need to earn to cover our needs?
One of the most frequent doubts is knowing the difference between real salary and nominal salaryTherefore, below we are going to explain what each one consists of and how they differ.
What is the salary?
First of all, you have to know that salary is the money a worker receives, usually periodically (it is usually monthly). From this you can differentiate the nominal wage and the real wage, which I will explain below:
Concepts of nominal wage and real wage
There are two terms to indicate the salary that one has, here the question arises as to why it is required two terms for the same salary, since the fact that there are two does not mean that those two salaries are received, but rather these terms serve to indicate two factors that are considered important of the salary; these terms are nominal wage and real wage, Next, a brief explanation of what each of them consists of will be given.
Nominal salary
The term nominal wage refers to the salary literally expressed in money; It is the sum of money that is paid to the worker for the work carried out during the stipulated day. When referring to the nominal wage we cannot give us a general idea about the level or real value of salary. The true value of this salary depends entirely on the level of prices that correspond to personal consumption objects, also on the value of the services that are required, as well as on the volume of taxes, among other common expenses.
Currently, in those countries where the system that governs the acquisition is Capitalism, despite the occurrence of an apparent increase in the expression of wages in terms of its monetary valueWhat is considered as the real salary that workers receive tends to decrease because of the increase in the prices of the articles that are considered as articles of common use, referring to the consumption that a worker makes to satisfy his needs; This decrease in value is also due to the increase in tax burdens, this is because the state's objective is that the workers are the ones who bear all the burden that is generated due to economic difficulties and the weight generated by the career of armaments.
On the contrary, in societies where the system is governed by socialism, the increase in the nominal wage -especially when it refers to the categories of workers and employees who receive low remuneration-, when it is accompanied by the price reduction of basic consumer items for workers, what is called the real wage of all workers is greatly increased. An extremely important part that constitutes this is the complement of nominal wage, which is provided by social consumer funds, which are intended to meet the collective needs of all members of socialist society. The allowances made by the Socialist State and also by the other social organizations that are created for said purposes, increase in practitioner one third the income that workers receive. As social production increases and at the same time the qualification of workers rises, little by little the wage levels of workers, employees and intellectuals will approach until they remain at a single level.
Real salary
This definition refers to salary expressed with respect to livelihoods and services of which the worker has with his salary; indicates the amount of consumer items that the worker is able to acquire, as well as the services that a worker can buy with his nominal wage (which is managed in the monetary amount that the worker receives). The value that can be given to the real wage depends on several considerations, enter some of them depends on the magnitude of nominal wage, another factor is the price level that correspond to consumer items and also the level of service prices, their magnitude is also determined by the cost of rents due to taxes imposed on workers by governments.
In countries that are ruled by Capitalism, what usually happens is that the item costs and also that of services, in addition to rents and taxes, are growing continuously. The class struggle that exists in these systems causes the nominal wage to change as well. It is practically a law of capitalism that the real wage of the worker behave in such a way that it tends to decrease. In these countries that are governed by the capitalist system, an event occurs that greatly affects the real wage, the automation of the manufacturing processes and the production that is carried out, entails the fact of increasing the number of workers and workers who are low-skilled and therefore these workers receive a low nominal salary which to a certain extent negatively affects the magnitude of the real wage.
Although the class struggle causes the nominal wage to be increased, the truth is that the rise in the nominal wage does not really compensate for the decrease in the magnitude of the real wage, since the other factors that determine it, such as the prices of the articles of Consumption and taxes that are required grow faster than the nominal wage. In this way we can find that the general trend, despite the nominal wage rising, is that each time the worker is less able to purchase basic consumer products. The way in which the government or the entities in charge of criticizing and regulating these issues calculate the average real salary of workers is according, not to specific groups in society, but to the sum of the salary of the workers with the salary of the workers. Well-paid employees, adding that of company managers and directors, other members of society, whether their nominal salary is low or high.
Under the administrations that are governed by socialism, this issue is handled in a different way because the salary does not constitute the value of the workforce, this means that the A worker's salary does not depend on the training of this, but rather is related to quality factors with which the employee's results are presented; Rather, it is representative of the expression in money of the part of the national income that corresponds to the workers and employees of a company or industry in order to cover the needs of personal consumption; As previously covered, this national income is distributed according to the quality of work, but also its quantity. According to the structure of the production of the socialist system advances, the real wage is constantly increasing. The argument is that the real wage is based on the productivity of labor in the national economy. The workers of the socialist society have an essential complement of the salary, a complement that is based on the social consumer funds, which raise the real income of the workers of the socialist society by one third.
What is the difference between nominal wage and real wage?
The best way in which we can differentiate and therefore be able to interpret the differences between both types of wages, lie in their nature. While the nominal wage would affect the numerical part and how much money do we receive, the real salary would be more focused on obtaining products and how many can we get. Whether the nominal (or numerical) part has the possibility of being exchanged for better products or better exchanges for other currencies has to do with the monetary policies of each zone. Thus, although the nominal wage is the most direct and easiest part to interpret, in reality the important part is how much we can do with it (the real wage). To do this, we are going to see the most notable differences between each one and how inflation ends up affecting them.
Purchasing power, purchasing power
Among all of them, the most relevant is the purchasing power that the employee has. That tends to adjust over time and labor movements to inflation, which translates into the following:
- Nominal Salary: It is the numerical part that governs. The total amount of money received. But this does not mean that we have more, since money is a tool to purchase products. If the price of products goes up and our nominal wage is low, we will be able to buy little. In this case, the nominal salary is the value reflected in the payroll, for example, € 1.300 per month.
- Real Salary: It would be the "physical" part of the nominal wage, that is, the amount of products that we can buy. A person who 15 years ago received € 1.300 and for example continues to receive € 1.300 today, his nominal salary would not have increased or decreased. However, inflation and the cost of living would have risen, so with € 1.300 today I would buy less things than 15 years ago.
To be more precise, in the last 15 years the average inflation rate in the Euro zone has been 1%. This means that in 15 years the cost of living has risen 26%. If a person had received € 1.300 15 years ago, with expenses of € 1.000, they could have saved € 300 per month. His real salary gave him slack. However, if his salary were maintained, today that same cost of living would cost him € 1.260, so he could have saved only € 40 per month. Your real salary in this case would be very tight.
How both wages should increase
Last but not least, is to understand how much should our salaries improve in order to maintain our standard of living. In view of the fact that the real salary is the one with which we define the obtaining of products, regardless of the currency used in our payroll, our goal is usually to maintain or increase it. To find out if our purchasing power has improved, let's look at inflation.
To maintain the same purchasing power, that is, the real wage, our nominal wage should increase in line with inflation. This implies that if one year inflation has increased by 2%, our nominal wage should also increase by 2%. In this way, the real wage could be maintained.
An increase in the nominal wage above inflation would lead to a better real wage because our purchasing power would increase. That is, if inflation one year is at 2%, as long as our salary increases by 2% or more, we would improve our purchasing power.
For that to happen, we must remember that when we talk about a 2% nominal salary increase, we must look at the net salary. The gross salary could increase in the same line as inflation, by 2%. However, this increase could not necessarily be reflected in the net salary if the deductions made in the payroll also increase when entering a different income tax bracket.
Conclusions of the nominal salary and real salary
In conclusion, we can say that the nominal salary is the remuneration that the employee receives in exchange for his work; on the other hand, what is defined as the real salary is more closely related to the cost of products and services that are required to meet the needs.
In more economic terms, the real salary indicates what the salary is capable of buying, whether the purchasing power of the worker when receiving his salary; It is highlighted that this type of salary has been affected by inflation, that is, a rise in prices due to factors out of control.
To better understand the difference between one and the other, the first thing we must do is define them strictly. Nominal salary is the amount of money that an employee receives, while the real salary is in relation to the prices of products and services.
The main and most important difference is that the nominal wage can be increased without necessarily increasing their welfareThis means that both the prices of products and services can rise more or in the same proportion as nominal wages. Because of this, it is the real salary that provides in a much more effective way what the salary is really worth, that is, what the worker can buy with his salary.
When all the factors come together so that the real salary increases is considered good newsIt is good because it means that the worker can purchase more products and services that satisfy their needs; on the other hand, if it drops, it means that they have less purchasing power, and therefore their ability to satisfy their needs decreases.
Do you have doubts about what is the base salary? We tell you:
And the question may arise as to how much is the most appropriate and corresponding thing to give the worker.
Tabulating salaries based on data and comparisons that manage to give us the correct information to satisfy the needs of the employee regarding their job position can even be facilitated by much with digital tools, to make a more equitable payment for their services.
Hello Davds, here in Spain, the salaries go by collective agreements, depending on the work you do, you are within an agreement and you have a minimum salary, on the other hand the employer can give you the salary you want, but it cannot be stopped your agreement. The ideal is what you say, but we are still close to that system, at least here. Greetings and thanks for the contribution.
Thanks for the article. I find the way in which the subject is approached very interesting. I would like to tell you that I have read several articles on the subject and this is the one that I liked the most. Congratulations, I appreciate the time you took to write it.