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Chart Book (6th edition): Annex - How to Calculate the Real Wage
Annex. How to Calculate the “Real” Wage
The current dollar value refers to dollars in the year they were received or paid, unadjusted for inflation. To figure out the real wage, or compare the purchasing power of wages from year to year, wages need to be adjusted by taking inflation into account.
Real income or real wage can be calculated by using the Consumer Price Index (CPI) reported monthly by the Bureau of Labor Statistics (BLS). The CPI shows overall changes in the prices of all goods and services bought for use by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer also are included. The index does not include income taxes and investment items, such as stocks, bonds, and life insurance. There are two indexes, the CPI-U for all urban consumers and the CPI-W for urban wage earners and clerical workers.
Wage earners can use wages from two different years and the consumer price index for those years to learn how much ground (if any) has been gained or lost from the first year to the later one. (The index with the most up-to-date figures is available from the BLS, at (202) 691-7000 or https://www.bls.gov/data/#prices) For instance, given:
Month and Year Wage CPI-W
August 2006 $22.25 197.11
August 2016 $28.24 234.10
Convert the wage in 2006 to 2016 dollars to figure out the real wage:
· Multiply: 2006 wage times the 2016 price index
22.25 x 234.10 = 5,208.73
· Divide: Previous answer by the 2006 price index
5,208.73/ 197.11 = 26.43
$26.43 is the purchasing power – how much the August 2006 wage ($22.25) can buy in August 2016.
To find out how much purchasing power was gained or lost during the 10 years:
·Subtract: The August 2016 wage minus the purchasing power in August 2016 of the old wage
$28.24 – $26.43 = $1.81
·Divide: Previous answer by purchasing power in August 2016 of the old wage
$1.81 / $26.43 = 0.0685 ≈ 6.9%
(Move the decimal point two places to the right to get a percentage.)
The real wage in this scenario has grown by 6.9% in 10 years. The purchasing power of the 2016 wage ($28.24) is 106.9% of what it was 10 years ago.
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