Final answer:
A 'real' wage increase refers to a rise in wages that exceeds the cost of living, enhancing the employee's purchasing power. It involves consideration of the substitution and income effects, which can influence individual labor supply decisions.
Step-by-step explanation:
A "real" wage increase describes an adjustment in compensation that accounts for changes in the cost of living, thereby reflecting an increase in purchasing power. The correct answer to the question is a) An increase greater than the cost of living. This increase means that workers can actually buy more goods and services with their earnings, despite any inflationary pressures. In economic terms, this takes into account both the substitution effect and the income effect. The former implies that as real wages rise, individuals might work more because leisure becomes relatively expensive, while the latter could lead to individuals working less since they can maintain the same standard of living without additional work. In essence, real wage increases make it attractive to work more due to the higher value of each work hour, but also make it possible to enjoy the same level of consumption with less work.