Question

Matt started working 4 years ago at $10 per hour, now he makes $17.50 per hour. His employer told the staff that Matt is making 40% more now compared to when he started. Sam, his colleague recommended him to check the last inflation rate over the last 4 years to see if Matt has made any real gains. Matt's gets informed that price level has risen by 33.7% in the last 4 years he has been working. Calculate real gains by taking price rise into account. Identify if Matt's wages increased or decreased, by how much? Answered required in both dollars and percentage.

Answer 1

As given, 4 years ago Matt got = $10/hr

Now we know with price rise the rate should also rise by the same percentage so that Matt be indifferent.

So, Rise in rate due to price rise of 33.7% :-

Rate after price rise = $10/hr + 33.7% = $13.37/hr

Now, If employer tells that Matt is making 40% more than what he used to get means that his salary in real terms must rise by 40%.

So, Now salary must increase by 40% from the original salary after price rise.

New Rate = $13.37/hr + 40% = $18.718/hr

So, Considering everything Matt should have earned at the rate of $18.718 per hour.

But he is actually getting $17.5 per hour.

So, Matt wages has decreased.  

Decrease in wage = $18.718 - $17.5

= $1.218 per hour

Percentage decrease = (Decrease/Estimated salary) * 100

= ($1.218/$18.718) * 100

= 6.5071%

So finally,

Matt wages decreased by $1.218 per hour or by 6.5071%