Reading up on the Chicago Teachers’ Union strike, I note not for the first time that in the real world nominal figures, rather than so-called “real” ones, matter a great deal:
Pay is also an issue. However, the union said the two sides are close to a pay agreement after school officials offered a deal that would increase salaries 16% over four years. The average teacher salary in Chicago was $74,839 for the 2011-2012 school year, according to the district.
If the other issues in the strike were resolved and the teachers and the district settled on this 16-percent-over-four-years that might be a pay bump or a pay cut depending entirely on the future trajectory of inflation. I take it that both sides are assuming that the Federal Reserve will persist in its policy of keeping inflation at close to but less than 2 percent per year, but there’s no guarantee of this. And yet that’s exactly how people negotiate deals—whether it’s an apartment lease or a two-year cell phone commitment or a teacher’s salary deal. We’re all enmeshed in a vast web of implicit and explicit nominal agreements, and in practice we tend to think in nominal terms.
It seems a bit weird to some people sometimes to assert that nominal shocks matter, but when you look at this kind of thing you see that it couldn’t be any other way. Even though “real” (i.e., CPI-adjusted prices) have the good name, very little in economic life is actually organized around them.