This subtitle might confuse you. What is the difference between nominal and real money? Further, what is the distinction between nominal and real wages? Simply put, nominal value is money’s face value. If you have a hundred-dollar bill, its nominal value is $100. On the other hand, its real value is what it can purchase. Let’s say you hold that $100 bill for a year, and in that year, prices of the things you normally buy rise by 10% (as measured by the Consumer Price Index, or CPI). Your $100 bill is now worth 10% less or $90 in real money. This is why high inflation is so pernicious; it erodes the value of your money. High inflation hurts poor people the most, because the things that usually inflate—food and energy—occupy a large portion of their budget. High inflation also hurts retired people on a fixed pension for the same reason. (As a side note, social security payments are increased every year according to the rise in the CPI, but many corporate pensions are not).
Nominal wages are the face value of the wages you receive, and similar to our discussion of real money above, real wages are what your wages can purchase. High inflation erodes the value of your wages, and this has a deep impact on your day-to-day life. Pew Research shows that real wages have been fat for the last 30 years or so, noting that despite the strong labor market,wage growth has lagged expectations. In fact, despite some ups and downs over the past several decades, today’s real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers (2018).
These relatively fat real wages have exacerbated both the income distribution and wealth distribution in the United States. The top 10% of income earners have gained an increasing share of total income, and this has also contributed to the top 10% owning an increasing share of the wealth in the United States.
Finally, it is worth noting that employers consider real wages in their hiring decisions. This is true both in economic theory and in their real-world decisions. An increase in wages above the CPI actually causes a drop in labor demand and vice versa. The fact that real wages have been stagnant for many years is good for employers but bad for workers.