Real salary – Definition, what it is and concept

The real salary is one that reflects the amount of goods and services that can be acquired with a certain nominal salary.

In economic terminology, there are two terms to refer to the salary a person receives. This is nominal salary and real salary. The nominal salary is the amount of money allocated, it is the value that appears on the payroll. The real salary is closely associated with the price index at consumer (CPI). Additionally, there is also talk of gross salary and net salary, although the latter is related to taxes.

The reason is that the nominal salary does not reflect the effects that inflation has on the money. The nominal salary will be the same before and after any inflationary process, unless there is no provision to increase it. On the other hand, the real salary is used to reflect aspects of people’s standard of living, since it takes into account the impact that the price variation of goods and services has on the purchasing power of the salary.

Magnitude of the real salary

The real salary is determined by several aspects, which is worth knowing to achieve understand in all its splendour the concept of real salary. The strength of Real salary is a function of the following aspects:

  • Nominal salary level. Ceteris Paribus, the higher the nominal salary received, the real salary will have greater purchasing power. That is, that more quantity of goods and services we can acquire.
  • Price level of goods and services. If the prices of the goods and services we consume daily are constantly increasing, then, lower purchasing power will have the salary. So we will have less and less life satisfaction.
  • Taxes and quotes. The tax burden on the nominal salary, as well as the level of property price tax will also have an impact on the real salary.

So, an acceptable nominal salary and good level stability Price is part of the key to achieving a good standard of living.

Example of real salary

Consider that at the beginning of the year the nominal salary received by Juan is 700 euros per month. At the end of the year, the price of goods and services that Juan consumes have increased by 15%. That is, an inflationary process has occurred in the economy. Therefore, Don Juan’s salary was increased to 770 euros per month, that is, he had a 10% increase in his salary.

Thus, Juan has had a drop of approximately 5% in his real salary. So now it has lower purchasing power. Your purchasing capacity is now diminished, the number of goods and services that you can consume with your salary being less.

This is a situation that is experienced daily in most of the underdeveloped countries. Price increases, salary increase. The salary increase, price increase. With a kind of vicious circle. The nominal salary chasing the real salary or the real salary chasing the nominal salary.