Question

(e) Suppose apple and orange pickers received a 2 percent increase in their wages. Based on your answer to part (d), would real wages of apple and orange pickers increase, decrease, or stay the same from year 1 to year 2 ? Explain.

Answer 1

If the annual wages of apple and orange pickers were increased by 2%, this would not imply that their real wages would increase by that percentage.

This is so because, given that America has an average annual inflation of 2%, the wage increase could only cover the increase in the costs of living of the workers and their families. Thus, in reality, their real wages (that is, the purchasing power that their wages would have in the market for goods and services) would remain stable, unchanged from the previous year.