When looking for a job, one of the things we usually consider most is salary ; we want it to be in line with the time invested and the tasks performed, also taking into account the individual's ability to do the job efficiently and in a way that benefits the company's finances. But what is our time really worth? How much money do we need to earn to cover our basic needs?
One of the most frequent questions is knowing the difference between real salary and nominal salary , so below we are going to explain what each one consists of and how they differ.
What is the salary?
First of all, it's important to know that salary is the money a worker receives, usually on a regular basis (typically monthly). This can be divided into nominal salary and real salary, which I will explain below:
Concepts of nominal wage and real wage
There are two terms used to indicate salary. This raises the question of why two terms are needed for the same salary. The fact that there are two terms doesn't mean that one receives two salaries; rather, these terms serve to indicate two factors considered important to the salary. These terms are nominal salary and real salary. Below is a brief explanation of what each of them consists of.
Nominal salary
The term nominal salary refers to the salary expressed literally in monetary terms ; it is the sum of money paid to the worker for the work performed during the stipulated workday. When referring to nominal salary, we cannot get a general idea about the level or real value of the salary . The true value of this salary depends entirely on the price level of consumer goods, the cost of services required, the amount of taxes, and other common expenses.
Currently, in countries where the system governing acquisition is capitalism, despite an apparent increase in the monetary value of wages , the real wages that workers receive tend to decrease due to the rising prices of everyday items used by workers to meet their needs. This decrease in value is also due to increased tax burdens, as the state aims to make workers bear the entire burden generated by economic hardship and the arms race.
Conversely, in societies governed by socialism, increases in nominal wages— especially for low-wage workers and employees—when accompanied by reductions in the prices of basic consumer goods, significantly raise what is known as the real wage of all workers. A crucial component of this is the supplement to nominal wages provided by social consumption funds, which are intended to meet the collective needs of all members of socialist society. The allocations made by the socialist state and other social organizations created for this purpose increase workers' income by approximately one-third. As social production increases and workers' skills improve, the wage levels of workers, employees, and intellectuals gradually converge until they reach a single level.
Real salary
This definition refers to wages expressed in relation to the means of subsistence and services available to the worker with their salary; it indicates the quantity of consumer goods and services a worker can purchase with their nominal wage (the monetary amount the worker receives). The value of the real wage depends on several factors , including the magnitude of the nominal wage, the price level of consumer goods and services, and the cost of rent and taxes levied on workers by the government.
In countries governed by capitalism, the costs of goods and services, as well as rents and taxes, typically rise continuously. The class struggle inherent in these systems also causes nominal wages to fluctuate. It is practically a law of capitalism that workers' real wages tend to decrease. In these capitalist countries, a factor that significantly impacts real wages is the automation of manufacturing and production processes. This leads to an increase in the number of low-skilled workers, who consequently receive low nominal wages, negatively affecting the magnitude of real wages.
While class struggle leads to an increase in nominal wages, the rise in nominal wages does not truly compensate for the decline in real wages. This is because other factors that determine real wages, such as the prices of consumer goods and taxes, increase at a faster rate than nominal wages. Thus, we find that the general trend, despite increases in nominal wages, is that workers have increasingly less purchasing power for basic consumer goods . The way in which the government or the entities responsible for criticizing and regulating these issues calculate the average real wage is not based on specific groups within society, but rather on the sum of the wages of blue-collar workers, the salaries of well-paid employees, and the salaries of company managers and directors, as well as other members of society, regardless of whether their nominal wages are low or high.
Under socialist administrations, this issue is handled differently, as wages do not constitute the value of labor power. This means that a worker's salary does not depend on their skills , but rather on the quality of their work. Instead, it represents the monetary expression of the portion of national income allocated to the workers and employees of a company or industry to cover their personal consumption needs. As previously discussed, this national income is distributed according to both the quality and quantity of labor. As the production structure of the socialist system advances , real wages steadily increase. The argument is that real wages are based on labor productivity within the national economy . Workers in socialist society receive an essential supplement to their wages, based on social consumption funds, which increase their real income by a third.
What is the difference between nominal wage and real wage?
The best way to differentiate, and therefore interpret, the differences between these two types of wages lies in their nature. While nominal wages affect the numerical aspect —how much money we receive— real wages are more focused on the goods and services we can acquire. Whether the nominal (or numerical) portion can be exchanged for better goods or for better exchange rates in other currencies depends on the monetary policies of each region. Thus, although nominal wages are the most direct and easiest to interpret, what truly matters is how much we can actually do with them (the real wage). To understand this, let's examine the most notable differences between each and how inflation ultimately affects 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, over the last 15 years the average inflation rate in the Eurozone has been 1.54%. This means that in 15 years the cost of living has risen by 26%. If someone had earned €1.300 15 years ago, with expenses of €1.000, they could have saved €300 per month. Their real salary provided a comfortable margin. However, if their salary remained the same, the cost of living would now be €1.260, meaning they would only be able to save €40 per month. Their real salary in this case would be very tight.
How both wages should increase
Finally, and equally important, is understanding how much our salaries need to increase to maintain our standard of living. Since real wages are what we use to define the purchase of goods and services, regardless of the currency used for our paychecks, our goal is usually to maintain or increase them. To determine if our purchasing power has improved, we'll look at inflation.
To maintain the same purchasing power, that is, real wages, our nominal wages should increase in line with inflation . This means that if inflation has risen by 2% in a given year, our nominal wages should also increase by 2%. In this way, real wages would remain stable.
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 nominal salary is the remuneration that the employee receives in exchange for their work ; on the other hand, what is defined as real salary is more related to the cost of the products and services required to cover 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 nominal wages can increase without a corresponding increase in well-being . This means that the prices of goods and services can rise more than, or at the same rate as, nominal wages. Therefore, real wages are a much more effective indicator of the true value of a worker's salary—what they can actually buy with their pay.
When all factors come together to increase real wages, it's considered good news . It's good because it means the worker can buy more products and services to meet their needs. On the other hand, if it falls, it means they have less purchasing power, and therefore their ability to meet their needs decreases.
Do you have doubts about what is the base salary? We tell you:
