Question

You make $20/hour in nominal wages today, your father made $10/hour in 1984, and your grandfather $5/hour in 1954.
If inflation is 3%/year, who had the highest real wage?

Answer 1

Answer:

Your grandfather had the highest real wage

Explanation:

To compare the wage in different years, we must calculate the present value (PV) of the wages.

Assuming this year is 2020, then there're 36 years from 1984 and 66 years from 1954.

We can use the inflation rate is the discount rate = 3%/ year.

PV of your wage is $20/ hour

PV of your father's = $10*(1+3%)^36=$29

PV of your grandfather = $5*(1+3%)^66=$35

So the grandfather had the highest real wage