Economic Rent and Transfer Earnings

Economic Rent and Transfer Earnings

• As well as receiving different wages, the nature of the wages that different groups of workers receive varies
• Transfer earnings are what a worker could earn in their best paid alternative employment – the opportunity cost of performing the current job
  • It is the minimum amount that has to be paid to ensure that the workers stays in their present job
• Economic rent is the surplus over transfer earnings, and so is: (total earnings – transfer earnings)
  • g. if a women earns £800 a week, and the best paid alternative job she is willing and able to do’s wage rate is £620 a week, her economic rent is £180 and her transfer earnings are £620

• The proportion of earnings that constitute economic rent and transfer earnings depends on the elasticity of supply of labour
  • When supply is inelastic (steep gradient), economic rent will form a large proportion of earnings
    • g. premiership footballers are said to have high economic rent, as they enjoy playing football, and would continue to play if their pay was cut.
  • When supply is elastic (shallow gradient), a greater proportion of earnings is taken up by transfer earnings
    • g. a high number of bar staff may only just be prepared to work for the going wage rate – if it were to fall, then a lot of them would switch to other unskilled work
  • However, if one were to take non-pecuniary factors into account, some people could be earning less than they could earn in another population
    • Effectively, these people receive negative economic rent.