Question

Explain whether the given statement is true, false or uncertain. Start your answer by selecting one of the options – “True”, “False” or “Uncertain” and then provide arguments to justify your selection (be brief and concise and present your arguments in 100 or less words). You need to ensure your assumptions are clear, reasonable and explicit if making any.

Question: Workers and employers in economy expected 3% inflation rate for 2015 but actual inflation turns out to be 5%. Kylie, a casual worker with no labour contract, has remained unaffected while Susie, a fixed term employee, has become worse-off.

Answer 1

False. The inflation has affected the real wages of both Kylie as well as Susie. The real wage of the informal worker is given by the nominal wage minus the inflation. In this case, the nominal wage of the informal worker is not increased at all, so her real wage declines by 5% due to the effect of inflation. On the other hand, the wage of the formal worker is increased by 3% as per the expected inflation rate. But since the actual inflation rate is 5%, the real wage of the formal worker declines by 2%. Therefore, the real wage of both Kylie and Susie have declined but to a greater extent for Kylie than Susie.