In labour economics, the real wage of workers will rise under which condition relating nominal wages and the general price level?

Introduction / Context:
In labour economics and macroeconomics, it is important to distinguish between nominal wages and real wages. Nominal wages are the wages measured in money terms, while real wages adjust these money wages for changes in the price level to reflect purchasing power. Workers care most about real wages because they indicate how many goods and services can be purchased with their income. This question asks you to identify the condition under which real wages rise by comparing the rate of change of nominal wages and the general price level.

Given Data / Assumptions:

• Nominal wage refers to the wage paid in current money units.
• The general price level reflects the average price of goods and services in the economy.
• Real wage is calculated by adjusting the nominal wage for inflation.
• We assume a standard relationship where real wage equals nominal wage divided by a price index.

Concept / Approach:
The key formula is that real wage equals nominal wage divided by the price index. If nominal wages and the price level are both changing over time, the direction of change in real wages depends on which variable is rising faster. If nominal wages rise faster than prices, the ratio increases and workers can buy more goods and services, implying a higher real wage. If prices rise faster than nominal wages, purchasing power falls and real wages decline. If both change at the same rate, real wages stay constant. Therefore, the correct answer must state that nominal wages increase more rapidly than the general price level.

Step-by-Step Solution:
Step 1: Recall that real wage equals nominal wage divided by the price index. Step 2: Consider what happens if both the numerator (nominal wage) and the denominator (price level) increase. Step 3: If the numerator increases faster than the denominator, the overall fraction increases. Step 4: An increase in the fraction means each unit of labour income can buy more goods and services. Step 5: Therefore, real wages rise when nominal wages grow more quickly than the general price level. Step 6: Choose the option that directly states this relationship.

Verification / Alternative check:
Use a numeric example to verify. Suppose the nominal wage rises from 100 to 110 units, a 10 percent increase. If the price index rises from 100 to 105, a 5 percent increase, then the real wage changes from 100 divided by 100 (which is 1) to 110 divided by 105, which is approximately 1.0476. This is an increase in real wage. If, instead, the price index rose to 115, which is a 15 percent increase, then real wage would be 110 divided by 115, which is approximately 0.9565, lower than the initial value. This confirms that real wages rise only when nominal wages grow faster than prices.

Why Other Options Are Wrong:
The option stating that nominal wages increase at the same rate as labour productivity is related to long run wage theory but does not directly describe real wage movement relative to prices. The options involving nominal wages falling, whether faster or at the same rate as prices, generally lead to constant or falling real wages, not a rise. The option stating that the general price level rises faster than nominal wages clearly implies falling purchasing power, so real wages decline. None of these describe a situation in which workers can buy more goods with their wages, so they are incorrect.

Common Pitfalls:
Students sometimes confuse productivity growth with real wage growth and assume they always move together. In practice, institutional factors, bargaining power, and inflation dynamics can break this link. Another common error is to forget the fraction nature of the real wage formula and misinterpret equal percentage changes in wages and prices. To avoid mistakes, always return to the simple expression: real wage equals nominal wage divided by the price index. Ask whether the numerator or the denominator is rising faster to determine the direction of change in real wages.

Final Answer:
Real wages will rise when nominal wages increase more rapidly than the general price level, because this increases the purchasing power of workers in terms of goods and services.