How is the real wage growth rate calculated after accounting for inflation?

• A. Real growth = nominal growth − inflation rate.
• B. Real growth = inflation rate − nominal growth.
• C. Real growth = nominal growth × inflation rate.
• D. Real growth = inflation rate ÷ nominal growth.

Answer: (B)

Real wage growth shows how workers’ purchasing power changes after prices rise. To measure it, you adjust nominal wage growth for inflation by subtracting the inflation rate from the nominal wage growth rate. This simple subtraction captures the idea that inflation erodes the value of additional wages. For example, if wages rise 5% but prices rise 2%, real wage growth is about 3%.

If you want a precise calculation, real growth can be computed as (1 + nominal growth) / (1 + inflation) − 1, but with typical rate levels the difference from the simple subtraction is small and subtraction is the common approximation.

Multiplying or dividing by inflation doesn’t reflect how inflation reduces purchasing power, so those options don’t describe real wage growth.