The phoneme is the basic building block for spoken words. In English, for example, there are an infinite number of possible words, but there are only about 45 phonemes. To make new words, we just delete or rearrange the phonemes — mat becomes man when the phoneme /t/ is replaced with the phoneme /n/, and deleting the phoneme /m/ from man leaves you with the word an. Awareness of the fact that a few phonemes are rearranged to make a lot of different words is what we call “phoneme awareness.”
The tem “phoneme awareness” should be distinguished from another commonly used term, “phonological awareness.” Phonological awareness is a general term describing a child’s awareness that spoken words are made up of sounds, phoneme awareness is a specific term that falls under the umbrella of phonological awareness. Phoneme awareness refers to the specific understanding that spoken words are made up of individual phonemes — not just sounds in general (which would include syllables, onsets, rimes, etc.). Children with phoneme awareness know that the spoken word bend contains four phonemes, and that the words pill and map both contain the phoneme /p/. And most importantly, they know that phonemes can be rearranged and substituted to make different words.
Phonological awareness is a step in the right direction, but phoneme awareness is what is necessary for the child to understand that the letters in written words represent the phonemes in spoken words (what we call the “alphabetic principle”). We spend a lot of time in phonics instruction teaching children that the letter M stands for the sound /m/, but we rarely make sure that children understand that words like milk, ham and family all contain the phoneme /m/, or that the difference between man and an is the deletion of the phoneme /m/. (See P is for Phonics)
Phoneme awareness can be demonstrated in a variety of ways. The easiest phoneme awareness task is called blending — an adult pronounces a word with a pause between each phoneme (e.g. /b/ /a/ /l/), and the child blends the phonemes together to make the word (“ball”). A more challenging assessment for children is the reverse, called phoneme segmentation — the adult says the whole word, and the child says the word with pauses between the phonemes (adult says “ball,” child says /b/ /a/ /l/, inserting a clear pause between each phoneme). Even more challenging is phoneme manipulation — the adult tells the child to say a word without a particular phoneme (say “boat” without the /t/), or the adult tells the child to add a phoneme to a word to make a new word (What word would you have if you added the phoneme /o/ to the beginning of “pen?”). If the child can reliably do any of these tasks, the child has demonstrated true phoneme awareness, but a relevant point to make here is that the child doesn’t need to do much more than these tasks to demonstrate phoneme awareness.
It is possible, in fact it is easy, to create phoneme awareness tasks that are exceptionally tricky, but research suggests that these should be avoided rather than exploited. English contains many confusing phonemes — there are diphthongs and glides that can confuse anybody, even mature, experienced readers (How many phonemes do you hear in pay?), and there are odd phonemes that are not universally defined (How many phonemes are in the word ring or fur?), and there are clusters of phonemes that are harder to segment than other phonemes (a cluster is a group of consonants that are perceived as a unit, sometimes until the child begins spelling — for example, the /pr/ in pray, the /gl/ in glow, and the /sk/ in school). It is important for the teacher to remember that the child doesn’t need to be an Olympic champion at phoneme manipulation — the child just needs to demonstrate knowledge of the fact that spoken words are made up of phonemes. It is also important that the teacher understands that phoneme awareness is not a magic bullet; it is important, and it is necessary for reading success, but it is only one skill of many that support literacy.
So to recap, phonics is an instructional approach that emphasizes the letter-sound relationships (which letters represent which sounds). Phonological awareness is a term used to describe the child’s generic understanding that spoken words are made up of sounds, and phoneme awareness specifically refers to a child’s knowledge that the basic building blocks of spoken words are the phonemes.
For further reading, check out this list of children’s books that can be read aloud to children to help develop their phoneme awareness.
You might also want to check out the Phoneme Awareness section on the professional books page.