Beyond Numbers: Why Real Wage Rate Matters More Than Nominal Wage Rate

 

In the ongoing discourse surrounding the call for an increase in minimum wage in Nigeria by the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC), much of the focus has been on the nominal wage rate—that is, the numerical value attached to workers' salaries. However, a deeper understanding of economic principles reveals that the real wage rate, adjusted for inflation and purchasing power, holds far greater significance for the financial well-being of workers and the overall economy.

The concept of money illusion, as elucidated by economist Irving Fisher, sheds light on why real wage rate should take precedence over nominal wage rate. Money illusion refers to the tendency of individuals to focus on nominal values, such as wages or prices, without considering changes in purchasing power due to inflation or deflation. In other words, people often fail to recognize that a rise in nominal wages may be offset by a corresponding increase in the cost of living.

For instance, imagine a scenario where the government approves a 10% increase in the nominal minimum wage. At first glance, this may appear to be a significant victory for workers, with higher numerical figures on their paychecks. However, if inflation is also on the rise, the purchasing power of those wages may actually decrease, leading to a situation where workers find themselves no better off—in real terms—than they were before the wage increase.

This phenomenon becomes particularly relevant in an economy experiencing inflationary pressures, as is often the case in Nigeria. Inflation erodes the value of money over time, leading to higher prices for goods and services. As a result, workers may find that their increased nominal wages are quickly consumed by rising costs, leaving them no better off in terms of their ability to afford essential goods and services.

Furthermore, an exclusive focus on nominal wage rate overlooks the broader implications for the economy as a whole. Inflationary wage increases can fuel a cycle of rising prices and wages, ultimately leading to cost-push inflation and economic instability. Employers may respond to higher wage demands by raising prices, which, in turn, prompts workers to demand further wage increases, perpetuating the cycle.

In contrast, a focus on real wage rate acknowledges the importance of ensuring that workers' incomes maintain their purchasing power over time. By indexing wage increases to inflation or implementing policies that promote price stability, policymakers can safeguard the real value of wages and contribute to sustainable economic growth. This approach not only benefits workers by preserving their standard of living but also promotes business confidence, investment, and long-term prosperity.

In conclusion, while the clamor for an increase in nominal wage rate by the NLC and TUC is understandable, a more nuanced understanding of economic principles suggests that real wage rate should be the primary focus of wage negotiations. By addressing the underlying factors driving changes in purchasing power and inflation, policymakers can ensure that wage increases translate into tangible improvements in the living standards of workers and contribute to a more resilient and equitable economy.