Test A – Question 12

In the agreement signed between the Histadrut and the employers, it was decided that the cost of living increase rate will now be only 10% of the rate of increase in the index.

Justify your answer.

A cost-of-living allowance is an increase of a certain percentage to wages, paid by employers to all employees in the economy following an increase in the index. Typically, the cost-of-living allowance rate is less than the rate of increase in the index.

The employee’s nominal wage is the wage in shekels that the employee receives. Following the payment of the cost of living supplement, the nominal wage increases.

The worker’s real wage is the wage that the worker receives in constant terms – that is, the worker’s nominal wage minus the increase in the index. If the rate of increase in cost of living is less than the rate of increase in the index, then the worker’s real wage has decreased.

In the initial situation, the employee’s salary is 7,000 NIS (this is the amount of money the employee receives).

During a certain period, the index increased by 10%, so a one percent cost-of-living increase is added to the employee’s salary (10% cost-of-living increase out of a 10% increase in the index = 1%), i.e. 70 NIS.

Therefore: The worker’s nominal wage will now be 7,070 NIS – meaning the worker’s nominal wage has increased.

The worker’s real wage decreases because his nominal wage increased by 1% while the index increased by a higher rate (10%).

Compared to the starting situation, it can be said that the worker’s real wage will now be approximately NIS 6,427 (according to: `6427=7070/1.1`), compared to NIS 7,000 before the increase in the index, meaning that his real wage has decreased.