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Real Wages

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In economics, real wages are the true value of wages relative to earlier periods, taking into account the effect of inflation. Real wages take into effect inflation for the purpose of more accurately measuring changes in purchasing power over time. In contrast to real wages, nominal wages do not take into effect the price level. For example, an organized labor agreement could include periodic modest pay increases based upon the consumer price index as a way to hold real wages constant. A nominal pay increase intended to prevent a decline in real wages is called a cost of living adjustment (COLA). Looking at real wages is necessary when considering economic trends over long periods of time, when the effect of compounding makes even modest levels of inflation important. Real wages is often more generally referred to as real income.



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