Why are real wages important?

Real wages are indeed significant because they reflect the purchasing power of income. When evaluating the economic well-being of individuals and households, real wages take into account the inflation rate and enable a more accurate measure of how much goods and services a worker can actually afford. If real wages are rising, it indicates that employees are able to buy more with their earnings, enhancing their standard of living and overall economic health. Conversely, if real wages are stagnant or falling, even if nominal wages increase, individuals may struggle to make ends meet due to higher prices for essentials.

While employment rates are influenced by various factors including economic conditions and policies, they are not exclusively determined by real wages. Minimum wage laws can relate to nominal wages rather than real wages directly, and productivity measures are typically assessed through outputs relative to inputs without a direct connection to the purchasing power aspect of wages. Thus, the essence of real wages lies in their role as a direct indicator of economic well-being through purchasing power.