A labour contract provides for a first-year wage of $15 per hour,and specifies that the real wage will rise by 2% in the second year of the contract and by another 2% in the third year.The consumer price index (CPI)is 100 in the first year,109 in the second year,and 115 in the third year.What dollar wage must be paid in the third year?

Question

Quizplus · Accepted Answer

To maintain a 2% real wage increase, the nominal wage must account for inflation. The real wage in the second year is $15 * (1 + 0.02) = $15.30. Adjusting for CPI, the nominal wage in the second year is $15.30 * (109/100) = $16.677. For the third year, the real wage is $15.30 * (1 + 0.02) = $15.606. Adjusting for CPI, the nominal wage in the third year is $15.606 * (115/100) = $17.9469, approximately $17.95.

A Labour Contract Provides for a First-Year Wage of $15