Economic Rent and Transfer Earnings

  • Transfer earnings are the minimum income a worker needs in order to supply their labour.
  • Economic rent is the extra income a worker receives – above the minimum level they need in order to work.

Diagram for Economic Rent and Transfer Earnings

economic-rent-transfer-earnings

Definition of Economic Rent

Economic Rent refers to income earned from a factor of production which is greater than the minimum necessary to bring the factor of production into operation.

Example of Economic Rent – Labour.

Suppose a football player would be willing to work for £200 a week. If the football player got paid £1,000 a week. His economic rent is £800 a week.

Economic rent is the area between the supply curve and the wage rate. The supply curve indicates the minimum wage people are prepared to work at.

The elasticity of demand and supply will determine the relative size of economic rent. If we take a footballer, demand is quite wage inelastic (not many alternatives to best players. Therefore, economic rent is relatively large.

Inelastic demand

economic-rent-inelastic

Low-skilled jobs – lower economic rent

For low skilled jobs, both supply and demand are more wage elastic.

economic-rent-elastic

With many workers qualified to work as a cleaner, supply is elastic. Most cleaners get paid only slightly above their transfer earings, therefore economic rent is relatively low.

Example of Economic Rent – Property

Suppose a landlord has a property and he would be willing to rent it out for a minimum of £400 a month. If the landlord was able to rent the property for £950 a month, then his economic rent is £550.

Definition of Transfer Earnings

Transfer earnings are defined as the minimum payment necessary to prevent a factor of production moving to a different use.

Example of Transfer Earnings for Labour

A worker may have a transfer earning of £150 a week. If he was paid less, he wouldn’t want to work in that occupation. For example, a worker may feel he is better off claiming unemployment benefits that working for less than £150 a week.

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