Question

3. Convert the nominal wage rates in the following table to real wage rates. The formula is Real (Nominal/Price Index) x 100, when you are converting a nominal number into a real number, getting rid of the effects of inflation, your resulting real number should be in the same units as the original nominal number. It should also be in the same general magnitude, unless you are going back hundreds of years of looking at a country that has experienced unusually high rates of inflation. In other words, when you convert the nominal wage rate of $7.25 in to a real wage rate, you should come up with something close to $7.25, such as $4.04 or $9.56. If you get an answer of $.04, then you know you made a mistake. 1976 1981 1989 1997 2006 2010 Nominal Minimum Wage $2.30 $3.35 $3.35 $5.15 $5.15 S7.25 CPI 56.9 90.9 124.0 160.5 201.6 219.2 Real Minimum Wage

Answer 1

Real minimum wage = (Nominal minimum wage/Price Index) times 100 Price index = CPI 1976 Real minimum wage = ($ 2.30/56.9) times 100 Real minimum wage = $ 4.04 1981 Real minimum wage = ($ 3.35/90.9) times 100 Real minimum wage = $ 3.68 1989 Real minimum wage = ($ 3.35/124) times 100 Real minimum wage = $ 2.70 1997 Real minimum wage = ($ 5.15/160.5) times 100 Real minimum wage = $ 3.20 \r\n 2006 Real minimum wage = ($ 5.15/201.6) times 100 Real minimum wage = $ 2.55 2010 Real minimum wage = ($ 7.25/219.2) times 100 Real minimum wage = $ 3.30