Real wages are defined as nominal wages (or wage in current money) adjusted for the price level.

Labor market

Real wage: When price levels change the real wage changes as well. If inflation is used to stimulate the economy more labor will be demanded, conversly if the price level contracts, the result is a higher real wage.

Keynesian Treatment[]

  • See also Phillips Curve

An expansionary monetary policy can change price level downward in the short run through inflating the currency. Assuming that in the short-run workers do not fully understand the changes in wage level (irregardless of if they understand price level changes in general), then they will feel wealthier (the nominal wage is all which is taken into consideration ==> sticky). Employers, on the other hand, see wages as the price of an input, so they demand more workers.

"Full" Employment is related to the concept of the Natural Rate of Unemployment. This could be the result of an Efficency Wage or as a result of some other condition where we see the employment of workers less than that which corresponds to those in the Labor Force. In reality the number of workers finding jobs is less than the number seeking them. See Unemployment

Total Employment: Would be a theoretically (albeit utopian) employment of every individual which indicated the desire to particpate in the labor force.

Periods of High Unemployment relate to periods of recession in the economy. This corresponds to a point where the real wage induces employers to afford less labor inputs in the production process than are offered by those in the labor force.

Labor Heterogeneity: an objection[]

Not all workers are equally able to perform all tasks the same way. If this is true (not usually assumed in these models) than the idea of "one" labor supply curve would not make sense, much less aggregation accross an entire economy. If the wage changes, it is likely that an employer would be willing to hire a different type of worker.

Real Business Cycle[]

In the real business cycle the real wage is theorized to be counter-cyclical explicitly because of the Marginal Productivity of Labor. [1]

Patrick, Geary, and Kennan (1982) Wages and employment are statistically unrelated

Other studies: Supply Shocks create pro-cyclical wages and Demand Shocks create counter-cyclical wages

Robert Hall (1988) Productivity is Procyclical

The sum of the analysis according to stadler is that the labor market does not confirm or deny the RBC model


If inflation is high, people will pay more attention to the real wage and the change in the nominal wage will be less important. This is why the phillips curve is hyperbolic. With large changes in inflation the "total employment" solution could not be reached because people would have to much incentive not to be fooled.


Stadler, George W. Real Business Cycles Journal of Economic Literature, Vol 32, No. 4 (Dec., 1994), 1750-1783 Stable URL

  1. in stadler